Attached files

file filename
EX-32.2 - NURX PHARMACEUTICALS, INC.v169993_ex32-2.htm
EX-31.2 - NURX PHARMACEUTICALS, INC.v169993_ex31-2.htm
EX-32.1 - NURX PHARMACEUTICALS, INC.v169993_ex32-1.htm
EX-31.1 - NURX PHARMACEUTICALS, INC.v169993_ex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended September 30, 2009
 
Commission File Number: 000-1174228
 
NURX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
NEVADA
87-0681500
   
(State or other jurisdiction of incorporation
(I.R.S. Employer Identification No.)
or organization)
 
   
18 Technology, Suite 130
Irvine, CA
92618
   
(Address of principal executive offices)
(Zip code)
 
Registrant’s telephone number: 949-336-7111
 
Securities registered under Section 12(b) of the Act:   None
 
Securities registered under Section 12(g) of the Act:  Common Stock, par value $0.001 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨  Yes  þ  No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨  Yes  þ  No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ  Yes ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨  Yes ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer¨
 
Accelerated filer¨
 
Non-accelerated filer¨
(Do not check if a smaller reporting company)
 
Smaller reporting company      þ  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes þ No
 
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by using the closing price of the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by using the closing price of registrant’s common stock of $0.49 per share, at March 31, 2009, was approximately $7,700,000.  For this purpose, the 7,743,172 shares of directors, executive officers and certain other shareholders have been excluded. This calculation does not reflect the impact of the Registrant’s amendment of its Bylaws, effective September 22, 2009, to adopt Sections 78.378 to 78.3793 of the Nevada Revised Statutes which impose voting restrictions on stockholders acquiring more than 20% of the Registrant’s voting stock.
 
As of December 18, 2009, 23,444,234 shares of common stock were outstanding.
 
Documents incorporated by reference

Document Description
  
10-K Part III
Portions of the Registrant’s proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of September 30, 2009 are incorporated by reference into Part III of this report.
  
Items 10, 11, 12,
13, 14

 

 

TABLE OF CONTENTS

   
Page
     
PART I
1
   
ITEM 1
DESCRIPTION OF BUSINESS
1
     
ITEM 1A.
RISK FACTORS
10
     
ITEM 1B
UNRESOLVED STAFF COMMENTS
26
     
ITEM 2
PROPERTIES
26
     
ITEM 3
LEGAL PROCEEDINGS
26
     
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
26
     
PART II
27
   
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
27
     
ITEM 6.
SELECTED FINANCIAL DATA
28
     
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
28
     
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
35
     
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
35
     
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
35
     
ITEM 9A.
CONTROLS AND PROCEDURES
35
     
ITEM 9B.
OTHER INFORMATION
36
     
PART III
36
   
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
36
     
ITEM 11.
EXECUTIVE COMPENSATION
36
     
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
35
     
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
35
     
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
35
     
PART IV
35
   
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
35

 
-i-

 

PART I

Introductory Comment
 
Throughout this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “our company,” “Company” and “NuRx” refer to NuRx Pharmaceuticals, Inc., a Nevada corporation formerly known as Quest Group International, Inc.
 
Forward Looking and Cautionary Statements
 
This Form 10-K contains certain forward-looking statements. For example, statements regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. These statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “potential(ly),” “continue,” “forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,” “should,” “expect” or the negative of such terms or other comparable terminology.  We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning.  However, these forward-looking statements are inherently subject to known and unknown risks and uncertainties.  Actual results or experience may differ materially from those expected or anticipated in the forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, regulatory policies, competition from other similar businesses, and market and general policies, competition from other similar businesses, and market and general economic factors.  This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Annual Report.
 
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we project.  Any forward-looking statement you read in this Annual Report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy, and liquidity.  All subsequent forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph.  You should specifically consider the factors identified in this Annual Report, which would cause actual results to differ before making an investment decision.  We are under no duty to update any of these forward-looking statements after the date of this Annual Report or to conform these statements to actual results.
 
 
ITEM 1
DESCRIPTION OF BUSINESS

Company Overview

NuRx Pharmaceuticals Inc. (“NuRx”) has historically been an early stage research and development biopharmaceutical company with a focus on oncology products (leukemia and lung cancer). The combination of (1) the current suboptimal conditions for new financing of a pure early stage, oncology-focused research and development biotech company and (2) the slower than expected recruitment in our U.S. clinical trials with its resultant delays in delivery of Phase II data has recently caused us to carefully re-evaluate our options.  On August 6, 2009, we suspended patient accruals under all four of our active U.S. clinical trials in order to reserve cash for other diversification opportunities, and to await preliminary data from patients already accrued and planned clinical trials in India.  Implementation for the Mexico clinical trials was also suspended.  As of September 30, 2009, we had a single active clinical trial for our lead compound, NRX 5183 (the “Lead Compound”) Phase II for Relapsed Acute Promyelocytic Leukemia (“APL”) being conducted in collaboration with Piramal Life Sciences, Limited (“Piramal”) at five sites in India with one patient enrolled.  The patient subsequently withdrew consent and exited the study.

In addition, we determined that we needed to expand our interests to broader areas of life sciences with products that offer a near term revenue stream to support the research and development programs. We examined a number of options in the medical diagnostics arena and ultimately focused on Point-of-Care diagnostics in human and veterinary medicine. On July 30, 2009, we invested $5,000,000 into a newly formed 50/50 joint venture with QuantRx Biomedical Corporation (“QuantRx”). The joint venture, called QN Diagnostics, LLC, a Delaware limited liability company (“QN Diagnostics”, “QND” or the “Joint Venture”), was formed to commercialize Point-of-Care diagnostic tests. The joint venture products will be focused on QuantRx’s proprietary lateral flow and optics technologies (whereby a sample of saliva, urine, or whole blood moves across a solid platform to interact with a reagent to produce colorimetric or other changes that can be measured qualitatively or quantitatively) and Point-of-Care delivery of data through novel and inexpensive readers.  We believe that the combination of QuantRx intellectual property with the capital, management and management expertise of NuRx will enable a rapid acceleration of product delivery and the near term generation of revenues.  As we continue to evolve and broaden our life sciences focus, we expect the QN Diagnostics joint venture to become a critical part of our health care portfolio.

 
1

 

Company History

We were formed as a Nevada corporation on August 14, 2001 as Quest Group International, Inc. We became a reporting company in March 2003. From our inception in 2001 until May, 2007, we were in the business of selling nutritional products to independent distributors and consumers in the United States and Japan. As a result of our entering into of a licensing agreement with Vitae Pharmaceuticals, Inc. (“Vitae”) in May 2007, we spun off our nutritional products business line and operate as a development stage pharmaceutical company with a focus on nuclear receptor target therapeutics. In connection with this change in business focus, we have changed our name to NuRx Pharmaceuticals, Inc.

QN Diagnostics Joint Venture

Joint Venture Agreement

On July 30, 2009, we entered into a Contribution Agreement (the “Contribution Agreement”) with QuantRx.  Pursuant to the Contribution Agreement, QuantRx contributed intellectual property and other assets related to its lateral flow strip technology and related lateral flow strip readers into the Joint Venture.

NuRx and QuantRx have also entered into a Limited Liability Company Agreement which governs the Joint Venture (the “LLC Agreement”).  Under the terms of the LLC Agreement, NuRx contributed $5,000,000 in cash to the Joint Venture.  Following the respective contributions by NuRx and QuantRx to the Joint Venture, NuRx and QuantRx each held a 50% interest in the Joint Venture.  The purpose of the Joint Venture is to research, develop and commercialize products incorporating the lateral flow strip technology and related lateral flow strip readers (the “Lateral Flow Products”).

Under the terms of the LLC Agreement, upon the consummation of the transactions contemplated by the Contribution Agreement, the Joint Venture made a $2,000,000 cash distribution to QuantRx.  In addition, subject to certain exceptions, NuRx, at its sole election, will be entitled to a distribution of up to $1,500,000 from the Joint Venture (the “NuRx Distribution”) which must be repaid by NuRx within thirty days after the Joint Venture meets certain milestone events.

The Joint Venture is managed by a board of directors (the “JV Board”) consisting of two NuRx designees, two QuantRx designees and an independent designee mutually selected by QuantRx and NuRx.  Subject to certain exceptions, JV Board decisions are made by majority vote, provided that NuRx and QuantRx have veto rights with respect to certain matters.

Pursuant to the LLC Agreement, each member is required to make sustaining capital contributions from time to time as the JV Board determines is necessary.  Sustaining capital contributions will be made by NuRx and QuantRx on an equal basis, provided however that QuantRx solely is responsible for making a sustaining capital contribution with respect to the first $700,000 determined to be required by the JV Board, and thereafter, NuRx solely will be responsible for making a sustaining capital contribution to the extent of any unpaid amount of the NuRx Distribution.

QuantRx and the Joint Venture have also entered into a Development and Services Agreement, pursuant to which the Joint Venture has agreed to pay a monthly fee to QuantRx in exchange for QuantRx providing all services, equipment and facilities related to the research, development, regulatory approval and commercialization of the Lateral Flow Products.  The current monthly fee being paid to QuantRx is $250,000. If the Joint Venture fails to reach certain milestone events, the Joint Venture will no longer be obligated to make the monthly payments.  All work product performed under the Development and Services Agreement is the sole property of the Joint Venture.

Each of NuRx and QuantRx have agreed not to compete with the Joint Venture with respect to the research, development and commercialization of Lateral Flow Products until (i) the earlier of the expiration of the LLC Agreement or (ii) the date on which the Joint Venture ceases to carry on the research, development and commercialization of Lateral Flow Products.

In connection with the entering into of the Joint Venture, NuRx received two warrants to purchase 2,000,000 shares of QuantRx common stock, or an aggregate of 4,000,000 shares of QuantRx common stock.  The warrants have a net issuance feature and expire on July 30, 2014.  The warrants have an exercise price of $0.50 and $1.25, respectively.

 
2

 

Lateral Flow Strip Technology

As part of the Contribution Agreement, the Joint Venture acquired a patented RapidSense technology developed by QuantRx – a one-step lateral flow test with unique features such as: positive read indication for drugs-of-abuse, improved sensitivity, and the ability to read both large and small molecules. The rapid, disposable, and Point-of-Care diagnostic technology is ideal for collection of either urine or oral fluids. The Joint Venture also acquired a patent to an innovative oral fluid collection device specifically designed for its RapidSense technology. This distinctive collection device has applications in the growing market of oral sample collections for issues ranging from drug-abuse testing, gathering biological evidence for criminal investigation, and screening for numerous communicable diseases including HIV/AIDS and other STDs.
 
The device incorporates a removable barrier that prevents test chemicals from washing into the oral cavity during the collection process, and allows the controlled start of the test or tests within the device. Because the device is designed for either single or multiple tests using the same sample, it is ideal for emerging drugs-of-abuse analyses and testing for a range of communicable diseases. The patented technology has a feature that provides a more secure "chain of custody" system, helping to ensure the identity and integrity of a specimen from collection through the reporting of test results.
 
The Joint Venture also acquired intellectual property related to a unique, quantitative, Point-of-Care optical reader to be used with its RapidSense technology. This technology, when coupled with RapidSense, would allow for the transfer of key laboratory tests to be performed at the Point-of-Care and would provide economical and efficient laboratory quality results.
 
In October 2007, the United States Food and Drug Administration (FDA) granted 510(k) clearance to QuantRx on its Follicle Stimulating Hormone (FSH) lateral flow immunoassay test for FSH at 10ng/ml. This female fertility test is a one-step lateral flow device that determines ovarian reserve indirectly by measuring FSH in first morning urine.  The Joint Venture will explore the feasibility of developing a male fertility test.
 
In 2008, QuantRx filed four 510(k) applications with the FDA for the RapidSense urine based drugs-of-abuse test product line and to date, the FDA has granted clearance on three of these applications. The Joint Venture has numerous additional RapidSense-based products in its 510(k) development pipeline, and anticipates additional 510(k) applications as funding provides. With the validation of the technology, the Joint Venture is exploring the economic viability of developing additional tests for drugs-of-abuse, as well as tests for infectious disease and cardiac markers.  The clearance on urine-based tests also sets the stage for development of saliva based tests.

Competition

The Point-of-Care diagnostics industry is highly competitive and characterized by rapid and significant technological change. Significant competitive factors in this industry include, among others, product efficacy and safety; the timing and scope of regulatory approvals; the government reimbursement rates for and the average selling price of products; the availability of raw materials and qualified manufacturing capacity; manufacturing costs; intellectual property and patent rights and their protection; and sales, marketing and distribution capabilities.
 
The Joint Venture faces, and will continue to face, competition from organizations such as pharmaceutical and biotechnology companies, as well as academic and research institutions. Some of these organizations, including Inverness Medical Innovations, Inc. and Quidel Corporation, are pursuing products based on technologies similar to the lateral flow strip technology. These organizations have developed and are currently marketing products, and are pursuing other technological approaches designed to produce products that compete with the JointVenture’s product candidates.
 
Any product candidates that the Joint Venture successfully develops, which are cleared for sale by the FDA or similar international regulatory authorities in other countries, may compete with competitive products currently being used or that may become available in the future. Many of the Joint Venture’s competitors have substantially greater capital resources than the Joint Venture has, and greater capabilities and resources for research, conducting preclinical studies and clinical trials, regulatory affairs, manufacturing, marketing and sales. As a result, the Joint Venture may face competitive disadvantages relative to these organizations should they develop or commercialize a competitive product.
 
Manufacturing
 
All manufactured products are produced under the Development and Services Agreement with QuantRx.
 
 
3

 
 
Intellectual Property Rights and Patents
 
The Joint Venture’s technology portfolio includes RapidSense Point-of-Care diagnostic products based on core intellectual property related to lateral flow techniques for the consumer and healthcare professional markets.  The Joint Venture currently has 12 patents related to Point-of-Care diagnostic technology.  The Joint Venture also holds numerous trademarks.
 
Patents and other proprietary rights are an integral part of the Joint Venture’s business. It is the Joint Venture’s policy to seek patent protection for its inventions and also to rely upon trade secrets and continuing technological innovations and licensing opportunities to develop and maintain its competitive position.
 
However, the patent positions of the Joint Venture involve complex legal and factual questions and, therefore, their enforceability cannot be predicted with any certainty. The Joint Venture’s issued patents, those licensed to the Joint Venture, and those that may be issued to the Joint Venture in the future may be challenged, invalidated or circumvented, and the rights granted thereunder may not provide the Joint Venture with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, the Joint Venture’s competitors may independently develop similar technologies or duplicate any technology developed by the Joint Venture. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of the Joint Venture’s product candidates can be approved for sale and commercialized, the Joint Venture’s relevant patent rights may expire or remain in force for only a short period following commercialization. Expiration of patents the Joint Venture owns or licenses could adversely affect our ability to protect future product development and, consequently, our operating results and financial position.
 
Regulatory Requirements
 
The Joint Venture’s product candidates and manufacturing activities are subject to regulation by the FDA, and by other federal, state, local and foreign regulatory authorities. Pursuant to the Food, Drug, and Cosmetic Act of 1938, commonly known as the FD&C Act, and the regulations promulgated under it, the FDA regulates the research, development, clinical testing, manufacture, packaging, labeling, storage, distribution, promotion, advertising and sampling of medical devices and medical imaging products. Before a new device or pharmaceutical product can be introduced to the market, the manufacturer must generally obtain marketing clearance through a section 510(k) notification, through a Premarket Approval (PMA), or NDA.
 
In the United States, medical devices intended for human use are classified into three categories, Class I, II or III, on the basis of the controls deemed reasonably necessary by the FDA to assure their safety and effectiveness with Class I requiring the fewest controls and Class III the most controls. Class I, unless exempted, and Class II devices are marketed following FDA clearance of a Section 510(k) premarket notification. Since Class III devices (e.g., a device whose failure could cause significant human harm or death) tend to carry the greatest risks, the manufacturer must demonstrate that such a device is safe and effective for its intended use by submitting a PMA application. PMA approval by the FDA is required before a Class III device can be lawfully marketed in the United States. Usually, the PMA process is significantly more time consuming and costly than the 510(k) process.
 
The U.S. regulatory scheme for the development and commercialization of new pharmaceutical products can be divided into three distinct phases: an investigational phase including both preclinical and clinical investigations leading up to the submission of an NDA; a period of FDA review culminating in the approval or refusal to approve the NDA; and the post-marketing period.
 
In addition, the FD&C Act requires device manufacturers to obtain a new FDA 510(k) clearance when there is a substantial change or modification in the intended use of a legally marketed device, or a change or modification, including product enhancements, changes to packaging or advertising text and, in some cases, manufacturing changes, to a legally marketed device that could significantly affect its safety or effectiveness. Supplements for approved PMA devices are required for device changes, including some manufacturing changes that affect safety or effectiveness, or disclosure to the consumer, such as labeling. For devices marketed pursuant to 510(k) determinations of substantial equivalence, the manufacturer must obtain FDA clearance of a new 510(k) notification prior to marketing the modified device. For devices marketed with PMA, the manufacturer must obtain FDA approval of a supplement to the PMA prior to marketing the modified device. Such regulatory requirements may require the Joint Venture to retain records for up to seven years, and be subject to periodic regulatory review and inspection of all facilities and documents by the FDA.
 
The FD&C Act requires device manufacturers to comply with Good Manufacturing Practices regulations. The regulations require that medical device manufacturers comply with various quality control requirements pertaining to design controls, purchasing contracts, organization and personnel, including device and manufacturing process design, buildings, environmental control, cleaning and sanitation; equipment and calibration of equipment; medical device components; manufacturing specifications and processes; reprocessing of devices; labeling and packaging; in-process and finished device inspection and acceptance; device failure investigations; and record keeping requirements including complaint files and device tracking. Joint Venture personnel and non-affiliated contract auditors periodically inspect the contract manufacturers to assure they remain in compliance.
 
The Joint Venture’s Portland, Oregon, facility is in compliance with current FDA requirements.

 
4

 

Drug Development Activities

Vitae License Agreement

On May 11, 2007, we entered into a license agreement with Vitae, a privately held company, under which we have acquired an exclusive, worldwide sublicense, with the right to grant further sublicenses, to certain compounds and technology for all human and veterinary use, including three clinical or pre-clinical stage therapeutic compounds.  Such technologies represent nearly 20 years of research and development work in the fields of retinoids, rexinoids, cancer biology, medicinal chemistry, manufacturing, pre-clinical and clinical drug development.  The opportunities are four-fold: (1) a leukemia therapy that is based on established mechanisms of action that is a more selective entrant into an established class of cancer therapy, (2) an early candidate for solid tumors (particularly lung and breast cancer), (3) a novel therapeutic approach to addressing the impact of chemotherapy associated neutropenia (a large, well established therapeutic need) and (4) a large library of other retinoid and rexinoid compounds that represent an internal pipeline.

Vitae originally licensed these compounds in May 2004 from Allergan, Inc., an Allergan affiliate, and Ligand Pharmaceuticals Incorporated.  These compounds and technology are covered by a number of issued U.S. and foreign patents and patent applications, and the term of our sublicense will extend in each country until the later of the last to expire of any patents that are issued covering this technology or ten years from the first commercial sale of a product agreement.  Vitae will retain its exclusive license from the existing licensors for certain excluded licensed compounds.
 
In connection with the license agreement, we paid Vitae out of the net proceeds of our private placement offering an upfront licensing fee of $2,100,000, and an additional $50,000 on August 15, 2007.  We also agreed to issue Vitae 5.66% of our fully diluted common stock, as of the date of the agreement, upon receiving investigational new drug application (“IND”) approval for clinical trials of any of the transferred compounds that had not already received IND approval.  This milestone was met on October 31, 2007 and the Company issued Vitae 1,756,732 shares (representing 5.66% after issuance of these shares).  We will be required on Vitae’s behalf to pay the existing licensors additional specified milestone payments if we receive marketing approval from the U.S. Food and Drug Administration (“FDA”) for a product containing a licensed compound.
 
In addition to the foregoing fees and milestone payments, we have agreed to pay Allergan (as well as its cross-licensee) and Vitae specified percentages of our net sales of products based on the licensed technology, which vary from product to product but which combined may total as much as 12% of our net sales. We have also agreed to pay Vitae a specified percentage of any sublicense revenues that we receive from our sublicensees. To maintain our rights to the licensed technology, we must meet certain development milestones under the original license agreements with the existing licensors. These milestones include, among others, filing at least one new drug application (“NDA”) in the U.S. or another major market for a product by May 10, 2011.

On December 31, 2008, we entered into an amendment of our May 11, 2007 license with Vitae for the license of additional compounds directed at dermatological therapeutic applications. We agreed to make a cash payment of $125,000 and to issue 50,000 shares of common stock valued at $2.00 per share upon execution of the license amendment. These costs have been charged to expense as in-process research and development for the year ended September 30, 2009.

Lead Compound

We have been focusing our drug development efforts on our Lead Compound NRX 5183 which will be developed for the treatment of leukemia.  On March 6, 2009, we entered into a development and commercialization agreement (the “Piramal Agreement”) with Piramal with respect to our Lead Compound.

Piramal is a pharmaceutical company listed on the Indian National Stock Exchange and the Bombay Stock Exchange and which was recently demerged from Piramal Healthcare Limited. Pursuant to the Piramal Agreement, Piramal has the exclusive right to develop, manufacture and exploit the technology related to our Lead Compound within India at its sole expense. We obtain the clinical data developed by Piramal for use in registration in countries outside of India. Piramal will also reimburse us for development expenses incurred with regard to clinical trials in India up to $100,000.  Until manufacturing is undertaken by Piramal, we will provide clinical grade drug product for use in clinical trials.

Except with respect to the clinical trials in India conducted in collaboration with Piramal, we have suspended patient enrollment in all other clinical trials.  We will, however, maintain our intellectual property with respect to our key compounds.

 
5

 

The following activities with respect to NRX195183 have been completed:

 
Received approval from Drug Controller General (India) to conduct the Phase II trial, and

 
Received Ethics Committee approval and opened five sites in India.

Based on patent protection, which specifically covers the Lead Compund as a new chemical entity (“NCE”), we believe that this compound has a generic competition-free product life until 2020.

Other Key Compounds

 
NRX194204 – we had previously been testing NRX194204 for safety in cancer patients in a Phase I/IIa clinical trial and in Phase II trials for non small cell lung cancer and mesothelioma.  We suspended our clinical trials with respect to this compound on August 6, 2009.

 
NRX194310 –  this compound is derived from a discovery program directed towards treatments for chemotherapy-induced neutropenia (low white cell count).   Further development of this compound is not currently budgeted.

Government Regulation

The United States and other developed countries extensively regulate the preclinical and clinical testing, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution of drugs and biologic products.  The FDA under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations, regulates pharmaceutical and biologic products.
 
To obtain approval of our product candidates from the FDA, we must, among other requirements, submit data supporting safety and efficacy for the intended indication as well as detailed information on the manufacture and composition of the product candidate.  In most cases, this will require extensive laboratory tests and preclinical and clinical trials.  The collection of this data, as well as the preparation of applications for review by the FDA involve significant time and expense.  The FDA also may require post-marketing testing to monitor the safety and efficacy of approved products or place conditions on any approvals that could restrict the therapeutic claims and commercial applications of these products.  Regulatory authorities may withdraw product approvals if we fail to comply with regulatory standards or if we encounter problems at any time following initial marketing of our products.

The first stage of the FDA approval process for a new biologic or drug involves completion of preclinical studies and the submission of the results of these studies to the FDA. This data, together with proposed clinical protocols, manufacturing information, analytical data and other information must be submitted to the FDA in an IND.  The IND must become effective before human clinical trials may commence.  Preclinical studies generally involve FDA regulated laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the product candidate.
 
After the IND becomes effective, a company may commence human clinical trials.  These are typically conducted in three sequential phases, but the phases may overlap.  Phase I trials consist of testing of the product candidate in a small number of patients or healthy volunteers, primarily for safety at one or more doses.  Phase I trials in cancer are often conducted with patients who are not healthy and who have end-stage or metastatic cancer. Phase II trials usually involve studies in a limited patient population to: (1) assess the efficacy of the drug in specific, targeted indications; (2) assess dosage tolerance and optimal dosage; and (3) identify possible adverse effects and safety risks.  If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III clinical trials, also called pivotal studies, major studies or advanced clinical trials, are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical trial sites.  In general, the FDA requires that at least two adequate and well-controlled Phase III clinical trials be conducted. A company must submit to the FDA a clinical protocol, accompanied by the approval of the Institutional Review Boards at the institutions participating in the trials, prior to commencement of each clinical trial.

 
6

 
 
To obtain FDA marketing authorization, a company must submit to the FDA the results of the preclinical and clinical testing, together with, among other things, detailed information on the manufacture and composition of the product candidate, in the form of a NDA. The FDA may request additional information before accepting an NDA for filing, in which case the application must be resubmitted with the additional information.  Once the submission has been accepted for filing, the FDA has 180 days to review the application and respond to the applicant.  The review process is often significantly extended by FDA requests for additional information or clarification.  The FDA may refer the NDA to an appropriate advisory committee for review, evaluation and recommendation as to scientific issues relevant to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee.
 
The amount of time taken by the FDA for approval of an NDA will depend upon a number of factors, including whether the product candidate has received priority review, the quality of the submission and studies presented, the potential contribution that the compound will make in improving the treatment of the disease in question, and the workload at the FDA.

The FDA may, during its review of an NDA, ask for additional test data that may require the conduct of additional clinical trials. If the FDA does ultimately approve the product candidate for marketing, it may require post-marketing testing to monitor the safety and effectiveness of the product. The FDA also may in some circumstances impose restrictions on the use of the product, which may be difficult and expensive to administer and may require prior approval of promotional materials.
 
If FDA evaluations of the NDA and associated support, such as manufacturing and clinical sites, are favorable, the FDA may grant us either an approval letter or an approvable letter.  An approvable letter will usually contain a number of conditions that must be met, which may include additional testing, in order to secure final approval of the NDA and authorization of commercial marketing of the drug for particular indications; however, the receipt of an approvable letter does not guarantee the final approval of a product.  The FDA may refuse to approve the NDA or grant us a non-approvable letter, outlining the deficiencies in the submission.  If regulatory approval of a product is granted, it will be limited to particular disease states and conditions of use, which are described in the product label.

After approval, adverse experiences with the product must be reported to the FDA.  In addition, the FDA may impose restrictions on the use of the drug that may be difficult and expensive to administer.  Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems occur or are discovered after the product reaches the market.  Finally, the FDA requires reporting of certain safety and other information, often referred to as “adverse events” that become known to a manufacturer of an approved drug.  Safety information collected through this process can result in changes to a product’s labeling or withdrawal of a product from the market.  If an active ingredient of a drug product has been previously approved, drug applications can be filed that may be less time-consuming and costly.
 
The FDA may, in some cases, confer upon an investigational product the status of a Fast Track product. A Fast Track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. The FDA can base approval of an NDA for a Fast Track product on an effect on a surrogate endpoint, or on another endpoint that is reasonably likely to predict clinical benefit. If a preliminary review of clinical data suggests that a Fast Track product may be effective, the FDA may initiate review of entire sections of a marketing application for a Fast Track product before the sponsor completes the application.
 
We will also be subject to a variety of regulations governing clinical trials and sales of our products outside the United States. Whether or not FDA approval has been obtained, approval of a product candidate by the comparable regulatory authorities of foreign countries and regions must be obtained prior to the commencement of marketing the product in those countries. The approval process varies from one regulatory authority to another and the time may be longer or shorter than that required for FDA approval. In the European Union, Canada and Australia, regulatory requirements and approval processes are similar, in principle, to those in the United States.
 
We also will be subject to federal regulation by the Occupational Safety and Health Administration and the Environmental Protection Agency as well as regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other federal and state regulatory statutes, and may, in the future, be subject to other federal, state or local regulations.

 
7

 

Commercial Markets

Because we are a development stage company, it is unclear what commercial markets may be available for the products we develop, if any. We plan to make progress towards individualized medicine in collaboration with Piramal allowing development of designer drugs for precise disease causation and to produce drugs that are cost effective thus allowing population at large to gain their benefits. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development due to harmful side effects or other characteristics that indicate they are unlikely to be effective drugs. While our research may lead to marketable products, we are unable to measure such marketability in commercial terms at this time.
 
Intellectual Property

We have acquired exclusive worldwide rights from Vitae to the compounds described herein. Our lead licensed compounds are covered by issued patents in the United States and certain foreign countries. In November 2007, we entered into an Annuity Payment Service Agreement with Computer Packages Inc. in order to help maintain and service our patent library.

Competition

The pharmaceutical and biopharmaceutical industry is characterized by intense competition and rapid and significant technological changes and advancements. Many companies, research institutions and universities are doing research and development work in a number of areas similar to those that we focus on that could lead to the development of new products which could compete with and be superior to our product candidates.
 
Most of the companies with which we compete have substantially greater financial, technical, manufacturing, marketing, distribution and other resources than those of ours. A number of these companies may have or may develop technologies for developing products for treating various diseases that could prove to be superior to ours. We expect technological developments in the pharmaceutical and biopharmaceutical and related fields to occur at a rapid rate, and we believe competition will intensify as advances in these fields are made. Accordingly, we will be required to continue to devote substantial resources and efforts to research and development activities in order to potentially achieve and maintain a competitive position in this field. Products that we develop may become obsolete before we are able to market them or to recover all or any portion of our research and development expenses. We will be competing with respect to our products with companies that have significantly more experience in undertaking preclinical testing and human clinical trials with new or improved therapeutic products and obtaining regulatory approvals of such products. A number of these companies already market and may be in advanced phases of clinical testing of various drugs that may compete with our lead product candidate or any future product candidates. Our competitors may develop or commercialize products more rapidly than we do or with significant advantages over any products we develop. Our competitors may therefore be more successful in commercializing their products than we are, which could adversely affect our competitive position and business.

Colleges, universities, governmental agencies and other public and private research organizations are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technologies that they have developed, some of which may be directly competitive with our lead product candidate or any future product candidates.
 
Our competitive position will be significantly impacted by the following factors, among others:
 
 
·
our ability to obtain FDA marketing approval for our product candidates on a timely basis;

 
·
the level of acceptance of our products by physicians, compared to those of competing products or therapies;

 
·
our ability to have our products manufactured on a commercial scale;

 
·
the effectiveness of sales and marketing efforts on behalf of our products;

 
·
our ability to meet demand for our products;

 
·
our ability to secure insurance reimbursement for our products candidates;

 
·
the price of our products relative to competing products or therapies;

 
·
our ability to recruit and retain appropriate management and scientific personnel; and

 
8

 

 
·
our ability to develop a commercial scale research and development, manufacturing and marketing infrastructure either on our own or with one or more future strategic partners.
Employees

During the year ended September 30, 2009, we terminated our clinical and pre-clinical development staff.  As of September 30, 2009, we had three full time employees, our chief executive officer, our chief scientific officer and our chief financial officer, and one part-time employee.  On October 3, 2009, our chief scientific officer’s employment was terminated and substituted with an hourly consulting agreement.  We do not expect significant changes in the number of our employees over the next year.

The Corporation

Our principal executive offices are located at 18 Technology, Suite 130, Irvine, California 92618, and our telephone number at that address is (949) 336-7111.
 
Private Placements

In May through June 2007, the Company raised approximately $20,500,000 from a small group of accredited investors from the sale of 41,000,000 shares of common stock at a price of $.50 per share in a private placement offering.  As adjusted for the 1-for-4 reverse stock split that took place in May 2008, this represents the sale of 10,250,000 shares of common stock at a price of $2.00 per share.  Pursuant to the terms of the private placement, these investors had certain anti-dilutive price protections until July 18, 2008.
 
Hunter World Markets, Inc. acted as the exclusive placement agent in the private placement offering, and received a fee of $2,012,500 (approximately 10% of the gross proceeds) and two six-year warrants 3,075,000 shares of the Company’s common stock at an exercise price of $4.00 per share on a post-split basis. These warrants expire in 2013. Hunter World Markets, Inc. also loaned us $125,000 at an interest rate of 6% per annum. This loan together with accrued interest and a loan fee of $12,500 was repaid from the proceeds of the private placement.
 
In connection with the private offering, stockholders who had acquired our common stock prior to April 27, 2007 canceled an aggregate 1,939,750 shares of common stock on a post-split basis in consideration for an aggregate amount of $750,000.

During the period between May 30, 2007 and June 27, 2007, we sold an aggregate 250,000 shares of our common stock at a price of $2.00 per share on a post-split basis and received aggregate proceeds of $500,000. In connection with the aforementioned sales, Hunter World Markets received a commission of 5% on half the gross proceeds and received a six-year warrant to purchase common stock equal to 75,000 shares at an exercise price of $4.00 per share on a post-split basis.

We do not currently anticipate that we will derive any revenues from either product sales or licensing with respect to out drug development in the near future.  We do not have any bank credit lines and have financed all of our prior operations through the sale of securities.  The estimated cost of completing the development of our current products and of obtaining all required regulatory approvals to market those products is substantially greater than the amount of funds we currently have available.   We will seek to obtain additional funds through various financing sources, including possible sales of our securities, and through strategic alliances or business combinations with other pharmaceutical or biopharmaceutical companies, but there is no assurance that we will be able to obtain any additional funding from any potential financing sources, or create any such alliances or combinations, or that the terms under which we would obtain any funding will be sufficient to fund our operations.
 
SEC FILINGS; INTERNET ADDRESS

We file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports with the SEC.  Our filings are available through the SEC Web-site, www.sec.gov, and at the SEC Public Reference Room at 100 F Street, NE Washington DC 20549. For more information about the SEC Public Reference Room, you can call the SEC at 1-800-SEC-0330.

MANAGEMENT

OUR EXECUTIVE OFFICERS

The following table sets forth the name, age and position held by each of our executive officers.
 
Name
 
Age
 
Position
Dr. Harin Padma-Nathan
 
53
 
Director, President and Chief Executive Officer
Steven Gershick
 
54
 
Chief Financial Officer
 
The following summarizes the backgrounds of our current executive officers.
 
Harin Padma-Nathan, MD has been the president and Chief Executive Officer of the Company since May 2007 and has served as a director since June 2007. He also has been Chief Scientific Officer at Insyght Interactive, a medical communications company, since 2004. Dr. Padma-Nathan has been a Clinical Professor of Urology at the Keck School of Medicine of the University of Southern California since 1995, and has also been involved in numerous clinical research studies from 1994 to 2006, including erectile dysfunction (Principal Investigator for Viagra as well as other compounds listed in CV), Hypertension, BPH, Incontinence, Coronary Artery Disease, Female Sexual Dysfunction, and Prostate Cancer. His publications include two in the New England Journal of Medicine.

Steven Gershick, CPA was appointed as the Chief Financial Officer of the Company by the Board of Directors in September 2007. Mr. Gershick has served as a consultant to the Company since June 2007. Mr. Gershick is also the Chief Financial Officer of Santa Monica Capital Partners and a financial and securities regulation consultant to Santa Monica Media Corporation. Prior to such positions, he served as Chief Financial Officer of PrimeGen Biotech, LLC, a stem cell research company, since 2004, and as a financial and securities regulation consultant for St. Cloud Capital Partners, LP, an SBIC providing mezzanine financing to middle market companies, since 2006. From 2002 until 2005, Mr. Gershick served as a financial and securities regulations consultant for Amazing Global Technologies, Ltd. and as Chief Financial Officer of Case Financial, Inc. Prior to such engagements, Mr. Gershick served as President and Chief Executive Officer of Spatializer Audio Laboratories, Inc. and its operating subsidiaries from 1992 to 1998. Mr. Gershick has been a certified public accountant since 1979.

 
9

 
 
 
ITEM 1A.
RISK FACTORS

An investment in our securities involves a high degree of risk.  You should carefully consider the risks described below before deciding to invest in or maintain your investment in our Company.  The risks described below are not intended to be an all-inclusive list of all of the potential risks relating to an investment in our securities.  If any of the following or other risks actually occur, our business, financial condition or operating results and the trading price or value of our securities could be materially adversely affected.
 
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Annual Report.
 
RISKS RELATED TO OUR BUSINESS
 
Because we have incurred significant losses to date and have limited funds to support our operations, our management has raised substantial doubt about our ability to continue our business.
 
We have limited funds to support our operations, and neither we nor our Joint Venture have generated revenues from operations.  We have historically financed our operations primarily through issuances of equity securities.  If we are to continue our pharmaceutical development activities, we will need to raise additional funds.  In addition, the Joint Venture will require additional funding to complete the development and launch of its initial products, which both venture partners are mutually obligated to provide. As a result, management believes that given the current economic environment and the continuing need to strengthen our cash position, there is substantial doubt about our ability to continue as a going concern.

Management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of debt or equity financing to (i) wind down the U.S. clinical trials and adequately support our clinical development partner in India; (ii) fund our share of future additional development costs of the Joint Venture; and (iii) manage or control working capital requirements by further reducing operating expenses. There can be no assurance that we will be successful in achieving our long-term plans as set forth above, or that such plans, if consummated, will enable us to obtain profitable operations or continue in the long term as a going concern.

We will be required to pursue sources of additional capital to fund our operations through various means, including equity or debt financing, funding from a corporate partnership or licensing arrangement or any similar financing.

Our future capital requirements will depend on many factors, including:

 
·
the capital requirements of the Joint Venture;

 
·
the timing of product introductions by the Joint Venture;

 
·
the magnitude of the Joint Venture’s and our research and development programs;

 
·
progress with clinical trials;

 
·
the time and costs involved in obtaining regulatory approvals;

 
·
the costs involved in filing and pursuing patent applications and enforcing patent claims;

 
·
competing technological and market developments;
 
10

 
 
·
the establishment of additional strategic alliances;

 
·
the cost of commercialization activities and arrangements, including manufacturing of our product candidates; and

 
·
the cost of product in-licensing and any possible acquisitions. 
 
Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have additional dilutive effects. In addition, if we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies, or grant licenses on terms that are not favorable to us. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial results. The significant downturn in the overall economy and the ongoing disruption in the capital markets has reduced investor confidence and negatively affected investments. As a result, there can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs on a timely basis, we may be required to cease operations and we may be unable to meet our obligations to fund the Joint Venture.

Neither we nor the Joint Venture may be successful in our respective efforts to develop commercially viable products.
 
Our ability to generate revenue and achieve profitability depends upon our ability, alone or with others, to complete the development of our proposed products, obtain the required regulatory approvals and manufacture, market and sell our proposed products. Development is costly and requires significant investment. We are seeking to develop Lateral Flow Products through the Joint Venture, as well as develop products for the treatment of acute myeloid leukemia through our clinical trials in collaboration with Piramal.
 
Although we have identified potential product candidates in the areas of Point-of-Care diagnostics through the Joint Venture and products for treatment of acute myeloid leukemia, the work needed to demonstrate their commercial viability is at a very early stage.  The follow-up research needed to demonstrate the viability of the product is costly and time-consuming, and may reveal that the product does not function as expected or that it is otherwise not commercially viable. It may take longer than current anticipated to develop potential product candidates.  During this time, a superior or equivalent products could emerge.
 
If either we or the Joint Venture are unable to confirm efficacy and safety of our product candidates through internal research programs, license suitable products or deliver technologies on acceptable business terms, our business prospects will suffer.  We cannot predict how long the development of investigational stage products will take or whether they will be medically effective.
 
Our Joint Venture with QuantRx  involves numerous risks.

We have entered into a joint venture agreement with QuantRx focused on the commercialization of medical diagnostic products.  The Joint Venture is subject to various risks that could adversely affect our results of operations.  These risks include the following:

 
·
our interests could diverge from QuantRx in the future or we may not be able to agree with QuantRx on ongoing manufacturing and operational activities, or on the amount, timing or nature of further investments in the Joint Venture;
 
11

 
 
·
due to financial constraints, QuantRx may be unable to meet their commitments to our Joint Venture and may pose credit risks for our transactions with them;

 
·
the terms of our Joint Venture arrangements may turn out to be unfavorable;

 
·
cash flows may be inadequate to fund increased capital requirements;

 
·
we may experience delays in obtaining any necessary regulatory approvals to market the medical diagnostic products produced by the Joint Venture;

 
·
we may experience difficulties and delays in ramping production of Joint Venture’s products; and

 
·
If our Joint Venture is unsuccessful, our business, results of operations or financial condition will be adversely affected.
 
Our efforts to redeem the shares held by DYVA Management Ltd. may not be successful.

On October 29, 2009, pursuant to the authority provided in the Bylaws and pursuant to Nevada Control Share Act ((the “Nevada Act”), we called for redemption of the entire 10,832,876 common share holding of DYVA Management Ltd. and its affiliates (“DYVA”), which such shares represent 46.2% of our total issued and outstanding shares.  Under the Nevada Act, we are entitled to call for redemption of DYVA’s shares at the average price paid by DYVA for its shares, which has been reported by DYVA to be for 833,298 Euros (approximately $1,231,000). On November 13, 2009, DYVA filed a complaint in the United States District Court, District of Nevada for declaratory and injunctive relief to halt the proposed redemption, In addition, the complaint seeks attorneys fees and costs to the extent permitted by law and any further and other relief the Court may deem proper.  We cannot assure you that we will be successful in our attempt to redeem the shares held by DYVA, or that our Board of Directors may elect to cease pursuing the redemption for business reasons.  In addition, regardless of merit or eventual outcome, the lawsuit filed by DYVA may cause a diversion of the Company’s management’s time and attention and the expenditure of legal fees and expenses.
 
Because the results of preclinical studies are not necessarily predictive of future results, we can provide no assurances that, even if our product candidates are successful in preclinical studies, such product candidates will have favorable results in clinical trials or receive regulatory approval.
 
Positive results from preclinical studies should not be relied upon as evidence that clinical trials will succeed.  Even if our product candidates achieve positive results in clinical studies, we will be required to demonstrate through clinical trials that these product candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale.  There is typically an extremely high rate of attrition from the failure of drug candidates proceeding through clinical trials.  If any product candidate fails to demonstrate sufficient safety and efficacy in any clinical trial, then we would experience potentially significant delays in, or be required to abandon, development of that product candidate.  If we delay or abandon our development efforts of any of our product candidates, then we may not be able to generate sufficient revenues to become profitable, and our reputation in the industry and in the investment community would likely be significantly damaged, each of which would cause our stock price to decrease significantly.

Our clinical trials may fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval.
 
We have limited experience conducting clinical trials.  Before obtaining regulatory approval for the sale of any of our potential products, we must subject these product candidates to extensive preclinical and clinical testing to demonstrate their safety and efficacy for humans.  Our Lead Compound has just entered Phase II clinical testing.  Clinical trials are expensive, time-consuming and may take years to complete.

In connection with the clinical trials of our product candidates, we face the risks that:

the product candidate may not prove to be effective;

we may not be able to manufacture the necessary quantity of our product candidates necessary for clinical testing;

the results may not replicate the results of earlier trials or clinical testing;

we or the FDA or similar foreign regulatory authorities may suspend the trials;

 
12

 

the results may not be statistically significant;

 
the product candidate may have undesirable or unintended side effects or toxicities that may prevent commercialization;

institutional review boards, ethics committees or the FDA could suspend or terminate our clinical trials;

 
the third parties conducting or overseeing the operation of our clinical trials to perform their contractual or regulatory obligations in a timely fashion;

patient recruitment may be slower than expected; and

patients may drop out of the trials or die during the trials. 

Phase I trials in cancer are often conducted with patients who are not healthy and who have end-stage or metastatic cancer.  During the course of treatment, these patients can die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested but which can nevertheless adversely affect clinical trial results.  Any failure or substantial delay in completing clinical trials for our product candidates may severely harm our business.
 
The results of our clinical trials are based on a small number of patients over a short period of time, and our progress may not be indicative of results in a large number of patients or of long-term efficacy.

Our clinical testing is based upon limited numbers of patients and a limited follow-up period.  Our Phase II clinical trial for our Lead Compound has opened in only five sites in India and enrolled only one patient who later withdrew consent and exited the study.  Results of later clinical trials that include more patients and more data points may not confirm favorable results from these early stage trials.  A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in earlier stage clinical trials.  If a larger population of patients does not experience positive results, or if these results are reproducible, our products may not receive approval from the FDA.  Failure to demonstrate the safety and effectiveness of our products in larger patient populations could have a material adverse effect on our business that would cause our stock price to decline significantly.
 
If we are unable to secure licenses to technologies or materials vital to our business, or if the rights to technologies that we have licensed terminate, our commercialization efforts could fail or be delayed.
 
Since our Lead Compound has been licensed to us, the failure to secure and maintain these licenses may cause the delay or termination of our development plans.  While we do not anticipate any challenges, unforeseen events can occur.  Intellectual property allowing for the exclusive development of therapies has a finite lifespan.  Prolonged delays in the successful development of therapies can lead to loss of exclusive, or even non-exclusive, marketing.  The development of our current clinical products is not subject to the need for additional licenses, however unforeseen blockades can occur. For instance, it may be necessary in the future for us to obtain additional licenses to avoid infringement of third-party patents.
 
If we were to materially breach our present license agreement or any future license or collaboration agreements, we could lose our ability to commercialize the related technologies, and our business could be materially and adversely affected.
 
We are party to intellectual property licenses and agreements which will be integral to our business.  Even once we have all necessary agreements and patent licenses in place to develop the compounds, subsequent unforeseen events may cause a deviation from our current business plan.  These licenses and agreements impose various research, development, due diligence, commercialization, sublicensing, royalty, indemnification, insurance and other obligations on us.  If we or our collaborators fail to perform under these agreements or otherwise breach obligations imposed by them, we could lose intellectual property rights that are important to our business.
 
We may not be successful in establishing additional strategic collaborations, which could adversely affect our ability to develop and commercialize products.
 
We may seek opportunities to establish new collaborations, joint ventures and strategic collaborations for the development and commercialization of products we discover and/or develop. We face significant competition in seeking appropriate collaborators and the negotiation process is time-consuming and complex.  We may not be successful in our efforts to establish additional strategic collaborations or other alternative arrangements.  Even if we are successful in our efforts to establish a collaboration or agreement, the terms that we establish may not be favorable to us. Disputes may arise in the future over the ownership of rights to any technology developed with collaborators.  These and other possible disagreements between us and our collaborators could lead to delays in the collaborative development or commercialization of therapeutic or diagnostic products.  Such disagreements could also result in litigation or require arbitration to resolve. We will also be dependent on several contractual services, the loss of which could result in delays in product development.  Finally, such strategic alliances or other arrangements may not result in successful products and associated revenue.

 
13

 

The biotechnology and pharmaceutical industry is highly competitive and subject to rapid technological change.
 
The biotechnology and pharmaceutical industry is highly competitive and subject to rapid and profound technological changes.  Our present and potential competitors, and the Joint Venture’s competitors, include major pharmaceutical companies, as well as specialized biotechnology and life sciences firms in the United States and in other countries.  Most of these companies have considerably greater financial, technical and marketing resources than us.  Additional mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in our competitors.  Our existing or prospective competitors may develop processes or products that are more effective than ours or may be more effective at implementing their technologies to develop commercial products faster.  Our competitors may succeed in obtaining patent protection and/or receiving regulatory approval for commercializing products before us.  Developments by our competitors may render our product candidates obsolete or noncompetitive.
 
We also experience competition from universities and other research institutions, and we are likely to compete with others in acquiring technology from those sources.  There can be no assurance that others will not develop technologies with significant advantages over those that we are seeking to develop, which could harm our business.
 
We may be unable to compete successfully with our competitors.
 
Through our activities in the Joint Venture we face competition from other companies seeking to identify and commercialize Point-of-Care diagnostics, and from our drug development activities, we face competition from companies seeking to develop products for the treatment of leukemia. We also compete with universities and other research institutions engaged in research in these areas.  Many of our competitors have greater technical and financial resources than us.

Our ability to compete successfully is based on numerous factors, including, the cost effectiveness of and levels of reimbursement for any product we ultimately commercialize relative to competing products; the ease of use and ready availability of any product we bring to market; the side effects of our product and the relative speed with which we are able to bring any product resulting from our research to market in our target markets.
 
If we are unable to distinguish our products from competing products, or if competing products reach the market first, we may be unable to compete successfully with current or future competitors.  This would cause our revenues to decline and affect our ability to achieve profitability.
 
We depend on certain key scientific personnel for our success.  The loss of any such personnel could adversely affect our business, financial condition and results of operations.
 
The scientific team is composed of individuals who have been involved in the development of the patents upon which the three initial target therapies are based.  The skill sets required to execute the development of therapies is dependent upon the unique skills, knowledge in the field, and knowledge around the specific technologies that represent the core of this business.  Skilled individuals who headed the discovery and development of many of our core programs, in particular Dr. Chandraratna, a consultant, is a crucial part of our drug development business.  In addition, Dr. William Fleming, Ph.D., Dr. Anthony Burgess-Cassler and Dr. Huiying Wang are a crucial part of the lateral flow business conducted by the Joint Venture.  The loss of any of these individuals, especially early in the life of our businesses can slow the progress.  Loss of one or more of these individuals may have a detrimental effect on our abilities to continue the development programs in a timely fashion.
 
Our dependence on collaborative relationships may lead to delays in product development, lost revenues and disputes over rights to technology.
 
Our business strategy depends to some extent upon the formation of research collaborations, development and services arrangements, and licensing and/or marketing arrangements.  Our current or any future collaborations or licensing arrangements ultimately may not be successful.  We currently have a license agreement with Vitae Pharmaceuticals, Inc. , as well as an agreement with Piramal to help us conduct our clinical trials in India.  The Joint Venture also has a Development and Services Agreement with QuantRx pursuant to which QuantRx provides research and development services related to the Lateral Flow Products. The termination of any collaboration or development agreement will result in the loss of any unmet development or commercial milestone payments, may lead to delays in product development and disputes over technology rights, and may reduce our ability to enter into collaborations with other potential partners.  In the event we breach any of these agreements, the third party may be entitled to terminate our agreement with them in the event we do not cure the breach within a specified period of time.  Any future collaborations, development or licensing arrangements may not be on terms favorable to us.

 
14

 

It may be necessary in the future for us to obtain additional licenses to avoid infringement of third-party patents.  Additionally, we may enter into license arrangements with other third parties as we build our product portfolio.  We do not know the terms on which such licenses may be available, if at all.
 
We depend on Piramal to support our clinical trials in India.  The investigators are not our employees, and we cannot control the amount or timing of resources that they devote to our programs.  If independent investigators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, it may delay or prevent the approval of our FDA (U.S.) and DGCI (India) applications and our introduction of new drugs.  Piramal may play a significant role in the conduct of the trials and the subsequent collection and analysis of data.  Failure of Piramal to meet its obligations could adversely affect clinical development of our products.  Moreover, Piramal may also have relationships with other commercial entities, some of which may compete with us.  If Piramal assists our competitors at our expense, it could harm our competitive position.
 
Disputes may arise in the future over the ownership of rights to any technology developed with collaborators.  These and other possible disagreements between us and our collaborators could lead to delays in the collaborative development or commercialization of products. Such disagreements could also result in litigation or require arbitration to resolve.

We may be subject to product liability and other claims that could have a material negative effect on our operations and on our financial condition.
 
The development and sale of medical products in general expose us to the risk of significant damages from product liability and other claims.  Product liability claims could delay or prevent completion of our clinical development programs.  If we succeed in marketing our proposed lead product candidate or any future product candidates, such claims could result in an FDA investigation of the safety and effectiveness of our products or our marketing programs, and potentially a recall of our products or more serious enforcement action, or limitations on the indications for which they may be used, or suspension or withdrawal of approval.  We plan to obtain and maintain product liability insurance for coverage of our clinical trial activities.  There is no assurance that we will be able to secure such insurance in the amounts we are seeking, or at all, for any of the trials for our proposed lead product candidate or any future product candidates.  We intend to obtain coverage for our products when they enter the marketplace (as well as requiring the manufacturers of our products to maintain insurance), but we do not know if insurance will be available to us at all or at acceptable costs.  The costs for many forms of liability insurance have risen substantially in recent years, and such costs may continue to increase in the future, which could materially impact our costs for clinical or product liability insurance.  If the cost is too high, we will have to self-insure, and we may have inadequate financial resources to pay the costs of any claims.  A successful claim in excess of our product liability coverage could have a material adverse effect on our business, financial condition and results of operations.

Before we can market our lead product candidate or any future product candidates, and before the Joint Venture can market the Lateral Flow Products, governmental approval or market clearance must be obtained  for each product candidate, the application and receipt of which is time-consuming, costly and uncertain.
 
Our lead product candidate and any future product candidates that we will be developing, including Lateral Flow Products developed by the Joint Venture for human use, will require approval or market clearance of the FDA before they can be marketed in the United States. Although our focus at this time is primarily on the U.S. market, in the future similar approvals will need to be obtained from foreign regulatory agencies before we can market our current or proposed product candidates in other countries. We cannot predict whether we will obtain approval for any of our product candidates.

The process for filing and obtaining FDA approval to market therapeutic products is both time-consuming and costly, with no certainty of a successful outcome.  The historical failure rate for companies seeking to obtain FDA approval of therapeutic products is high.  This process includes conducting extensive preclinical research and clinical testing, which may take longer and cost more than we initially anticipate due to numerous factors, including without limitation, difficulty in securing appropriate centers to conduct trials, difficulty in enrolling patients in conformity with required protocols in a timely manner, unexpected adverse reactions to our proposed product candidates by patients in the trials and changes in the FDA’s requirements for our testing during the course of that testing. The FDA may require additional preclinical which could necessitate significant expenditures that we have not budgeted and which could significantly delay the commencement of clinical trials.  The formulation of our product have not been previously tested in patients, and we may encounter unexpected and adverse immune responses or other side effects in the patients whom we test our products.

 
15

 

The time required to obtain FDA and other approvals is unpredictable but often can exceed five years following the commencement of clinical trials, depending upon the complexity of the product.  Any analysis we perform of data from preclinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval.  We may also encounter unexpected delays or increased costs due to a variety of reasons, including new government regulations from future legislation or administrative action, or from changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.
 
Any delay or failure in our clinical trial program and in obtaining required approvals would have a material adverse effect on our ability to generate revenues from the particular product.  Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product.  These limitations may limit the size of the market for the product.

The Fast Track designation for development of our lead product candidate or any other potential product candidate may not lead to a faster development, regulatory review or approval process, and it does not increase the likelihood that our product candidate will receive marketing approval.
 
If a drug is intended for the treatment of a serious or life threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA Fast Track designation for a particular indication.  Marketing applications filed by sponsors of products in Fast Track development may qualify for priority review under the policies and procedures offered by the FDA, but the Fast Track designation does not assure any such qualification or ultimate marketing approval by the FDA.  Receipt of Fast Track designation may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures.  In addition, the FDA may withdraw any Fast Track designation at any time. We may seek Fast Track designation for our lead product candidate or any future product candidates, but there is no assurance that the FDA will grant this status to any of our proposed product candidates.
 
Because our lead product candidate represents and our other future potential product candidates will represent novel approaches to the treatment of disease, there are many uncertainties regarding the development, the market acceptance, third party reimbursement coverage and the commercial potential of our product candidates.
 
There is no assurance that the approaches offered by our lead product candidate or any future product candidates will gain broad acceptance among doctors or patients or that governmental agencies or third party medical insurers will be willing to provide reimbursement coverage for our proposed product candidates.  Moreover, we do not have internal marketing data research resources and are not certain of and have not attempted to independently verify the potential size of the commercial markets for our lead product candidates or any future product candidates.  Since our lead product candidates and any future product candidates will represent new approaches to treating various conditions, it may be difficult, in any event, to accurately estimate the potential revenues from these product candidates.  We may spend large amounts of money trying to obtain approval for these product candidates, and never succeed in doing so. In addition, these product candidates may not demonstrate in large sets of patients the pharmacological properties ascribed to them in the laboratory studies or smaller groups of patients, and they may interact with human biological systems in unforeseen, ineffective or even harmful ways either before or after they are approved to be marketed.  We do not yet have sufficient information to reliably estimate what it will cost to commercially manufacture our lead product candidate or any future product candidates, and the actual cost to manufacture these products could materially and adversely affect the commercial viability of these products.  As a result, we may never succeed in developing a marketable product.  If we do not successfully develop and commercialize products based upon our approach, we will not become profitable, which would materially, adversely affect the value of our common stock.
 
Other factors that are presently unknown to us that we believe will materially affect market acceptance of our lead product candidate or any future product candidates include:

 
the timing of our receipt of any marketing approvals, the terms of any approvals and the countries in which approvals are obtained;

 
the safety, efficacy and ease of administration;

 
the availability of government and third-party payor reimbursement;

 
the pricing of our product candidates, particularly as compared to alternative treatments;

 
the availability of alternative effective forms of treatments, at that time, for the diseases that the product candidates we are developing are intended to treat;

 
16

 

 
acceptance by patients and physicians;

 
effectiveness of our sales and marketing efforts;

 
marketing and sales activities of competitors;

 
market satisfaction with existing alternative therapies;

 
regulatory approval in other jurisdictions;

 
successful building and sustaining of manufacturing capability; and

 
our ability to enter into managed care and governmental agreements on favorable terms. 

Since our lead product candidate and the Lateral Flow Products  utilize new or different mechanisms of action and in some cases there may be no regulatory precedents, conducting clinical trials and obtaining regulatory approval may be difficult, expensive and prolonged, which would delay any commercialization of our products.
 
To complete successful clinical trials, our product candidates must demonstrate safety and provide substantial evidence of efficacy.  The FDA generally evaluates efficacy based on the statistical significance of a product candidate meeting predetermined clinical endpoints.  The design of clinical trials to establish meaningful endpoints is done in collaboration with the FDA prior to the commencement of clinical trials.  These endpoints are established based on guidance from the FDA, including FDA guidance documents applicable to establishing the efficacy, safety and tolerability measures required for approval of products.  However, since some of our product candidates utilize new or different mechanisms of action, the FDA may not have established guidelines for the design of our clinical trials and may take longer than average to consider our product candidates for approval.  The FDA could change its view on clinical trial design and establishment of appropriate standards for efficacy, safety and tolerability and require a change in clinical trial design, additional data or even further clinical trials before granting approval of our product candidates.  We could encounter delays and increased expenses in our clinical trials if the FDA concludes that the endpoints established for a clinical trial do not adequately predict a clinical benefit.

If we or our collaborators, manufacturers or service providers fail to comply with regulatory laws and regulations, we or they could be subject to enforcement actions, which could affect our ability to market and sell our lead product candidate and any future product candidates and may harm our reputation.
 
If we or our collaborators, manufacturers or service providers fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, which could affect our ability to develop, market and sell our lead product candidate or any future product candidates under development successfully and could harm our reputation and lead to reduced or non−acceptance of our proposed product candidates by the market.  Even technical recommendations or evidence by the FDA through letters, site visits, and overall recommendations to academia or biotechnology companies may make the manufacturing of a clinical product extremely labor intensive or expensive, making the product candidate no longer viable to manufacture in a cost efficient manner.  The very nature of the product may make the product candidate not commercially viable.  The required testing of the product candidate may make that candidate no longer commercially viable.  The conduct of clinical trials may be critiqued by the FDA, Institutional Review Board, or the Institutional Biosafety Committee, which may delay or make impossible clinical testing of a product candidate.  The Data Safety Monitoring Committee may stop a trial or deem a product unsafe to continue testing.  This may have significant negative repercussions on the value of the product and may have negative repercussions on the Company and on the shareholders. Clinical investigator misconduct could also result in delays or rejection of our applications for approval of our product candidates.  Clinical investigator misconduct that raises questions about the integrity of data in one or more applications (e.g., fraud, bribery, omission of a material fact, gross negligence) could be used by the FDA as grounds to suspend substantive scientific review of all pending marketing applications until the data in question have successfully undergone a validity assessment.  Product candidates that fail validity assessments must be withdrawn from FDA review or, if the drug is an approved, marketed product, such product must be removed from the market.
 
17

 
Failure to comply with all applicable regulations, including those that require us to obtain and maintain governmental approvals for our product candidates, may result in fines, corrective actions, administrative sanctions and restrictions, including the withdrawal of a product from the market.

Pharmaceutical companies are subject to significant regulation by a number of national, state and local agencies, including the FDA.  Such regulations and their authorizing statutes are amended from time to time.  Failure to comply with applicable regulatory requirements could, among other things, result in fines, corrective actions, administrative sanctions, suspensions or delays of product manufacture or distribution or both, product recalls, delays in marketing activities and sales, withdrawal of marketing approvals, and civil or criminal sanctions including possible exclusion from eligibility for federal government contracts payment of our products by Medicare, Medicaid, and other third-party payors.
 
After initial regulatory approval, the manufacturing and marketing of drugs, including our products, are subject to continuing FDA and foreign regulatory review.  Additionally, the FDA encourages health professionals to report significant adverse events associated with products.  The FDA may require additional clinical studies, known as Phase IV studies, to evaluate product safety effects.  In addition to studies required by the FDA after approval, we may conduct our own Phase IV studies to explore the use of the approved drug product for treatment of new indications or to broaden our knowledge of the product.  The subsequent discovery of previously unknown problems with a product’s safety or efficacy as a result of these studies or as reported in their prescribed use may result in restrictions through labeling changes or withdrawal of the product from the market.
 
The FDA periodically inspects drug manufacturing facilities to ensure compliance with applicable good manufacturing practice regulations. Failure to comply with statutory and regulatory requirements subject the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or voluntary recall of a product.
 
Additional authority to take post-approval actions was given to the FDA under the FDA Amendments Act of 2007, which went into effect on October 1, 2007.  The FDA is authorized to revisit and change its prior determinations if new information raises questions about our product’s safety profile.  The FDA is authorized to impose additional post-marketing requirements such as:
 
 
testing and surveillance to monitor the product and its continued compliance with regulatory requirements;

 
submitting products for inspection and, if any inspection reveals that the product is not in compliance, the prohibition of the sale of all products from the same lot;

 
requiring us or our partners to conduct long-term safety studies if new information raises questions about our product’s safety profile;

 
requiring labeling changes to help ensure the safe and effective use of products;

 
requiring development and implementation of a Risk Evaluation and Mitigation Strategies plan if the FDA determines that it is necessary to help ensure that the drug’s benefits continue to outweigh the risks of a serious adverse drug experience;

 
requiring corrective and preventive actions and/or suspending manufacturing;

 
withdrawing marketing approval;

 
seizing adulterated, misbranded or otherwise violative products;

 
seeking to enjoin the manufacture or distribution, or both, of an approved product, or seeking an order to recall an approved product, that is found to be adulterated or misbranded; and

 
seeking monetary fines and penalties, including disgorgement of profits, if a court finds that we are in violation of applicable law.

Even before any formal regulatory action, we could voluntarily decide to cease distribution and sale, or recall, any of our products if concerns about safety or effectiveness develop, if certain good manufacturing practice deviations are found, or if economic conditions support such action.

In its regulation of advertising, the FDA may issue correspondence to pharmaceutical companies alleging that its advertising or promotional materials are false, misleading or deceptive.  The FDA has the power to impose a wide array of sanctions on companies for such advertising practices and if we were to receive correspondence from the FDA alleging these practices it may be necessary for us to:

  
incur substantial expenses, including fines, penalties, legal fees and costs to conform to the FDA’s limits on such promotion;

 
18

 

 
change our methods of marketing, promoting and selling products;

   
take corrective action, which could include placing advertisements or sending letters to physicians correcting statements made in previous advertisements or promotions; or

 
disrupt the distribution of products and stop sales until we are in compliance with the FDA’s interpretation of applicable laws and regulations. 

In addition, in recent years some alleged violations of FDA requirements regarding off-label promotion of products by manufacturers have been used to support whistleblower and/or government actions under the federal civil False Claims Act, resulting in substantial monetary settlements.  Also, various legislative proposals have been offered in Congress and in some state legislatures that include major changes in the health care system.  These proposals have included price or patient reimbursement constraints on medicines and restrictions on access to certain products.  We cannot predict the outcome of such initiatives and it is difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting us.
 
We are subject to “fraud and abuse” and similar government laws and regulations, and a failure to comply with such laws and regulations, or an investigation into our compliance with such laws and regulations, or a failure to prevail in any litigation related to noncompliance, could harm our business.
 
We are subject to multiple state and federal laws pertaining to health care fraud and abuse.  Pharmaceutical pricing, sales, and marketing programs and arrangements, and related business practices in the health care industry generally are under increasing scrutiny from federal and state regulatory, investigative, prosecutorial, and administrative entities.  Many health care laws, including the federal and state anti-kickback laws and federal and state statutory and common law false claims laws, have been construed broadly by the courts and permit government entities to exercise considerable discretion.  In the event that any of these government entities believed that wrongdoing had occurred, one or more of them could institute civil administrative or criminal proceedings which, if instituted and resolved unfavorably, could subject us to substantial fines, penalties, and injunctive and administrative remedies, including exclusion from government reimbursement programs.  Any such result could have a material adverse impact on our results of operations, cash flows, financial condition, and our business.  Such investigations could be costly, divert management’s attention from our business, and result in damage to our reputation.  We cannot guarantee that measures that we have taken to prevent violations  will protect us from future violations, lawsuits or investigations.  If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant negative impact on our business, including the imposition of significant fines or other sanctions.
 
Failure to adequately control compliance with all applicable laws and regulations may adversely affect our business, and we may become subject to investigative or enforcement actions.
 
There are extensive state, federal and foreign laws and regulations applicable to pharmaceutical companies engaged in the discovery, development and commercialization of medicinal products and for medical diagnostics products intended for human use.  There are laws and regulations that govern areas including financial controls, clinical trials, testing, manufacturing, labeling, safety, packaging, shipping, distribution and promotion of pharmaceuticals, including those governing interactions with prescribers and healthcare professionals in a position to prescribe, recommend, or arrange for the provision of our products.
 
In recent years, pharmaceutical companies have been the targets of extensive whistleblower actions in which the person bringing an action alleges a variety of violations of the civil False Claims Act or its state equivalent, in such areas as pricing practices, off-label product promotion, sales and marketing practices, improper relationships with physicians and other healthcare professionals, among others.  The potential ramifications are far-reaching if there are areas identified as out of compliance by regulatory agencies including, but not limited to, significant financial penalties, manufacturing and clinical trial consent decrees, commercialization restrictions, exclusion from government programs, product recalls or seizures, or other restrictions and litigation.  Furthermore, there can be no assurance that we will not be subject to a whistleblower or other investigative or enforcement action at some time in the future.
 
Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.
 
We intend to market our products in international markets.  In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals.  The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval.  The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval.  We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA.  We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

 
19

 

We are subject to uncertainty relating to health care reform measures and reimbursement policies which, if not favorable to our product candidates, could hinder or prevent our product candidates’ commercial success.
 
The continuing efforts of the government, insurance companies, managed care organizations and other payors of health care costs to contain or reduce costs of health care may adversely affect:  (1) our ability to generate revenues and achieve profitability; (2) the future revenues and profitability of our potential customers, suppliers and collaborators; and (3) the availability of capital.
 
In certain foreign markets, the pricing of prescription pharmaceuticals is subject to government control.  In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems.  While we cannot predict the full effects of the implementation of this new legislation or whether any legislative or regulatory proposals affecting our business will be adopted, the implementation of this legislation or announcement or adoption of these proposals could have a material and adverse effect on our business, financial condition and results of operations.
 
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a voluntary outpatient prescription drug benefit under Part D of the Social Security Act.   The program, which went into effect January 1, 2006, is administered by the Centers for Medicare & Medicaid Services within the Department of Health and Human Services and is implemented and operated by private sector Part D plan sponsors.  The federal government can be expected to continue to issue guidance and regulations regarding the obligations of Part D sponsors and their subcontractors. 
 
Each participating drug plan is permitted by regulation to develop and establish its own unique drug formulary that may exclude certain drugs from coverage, impose prior authorization and other coverage restrictions, and negotiate payment levels for drugs which may be lower than reimbursement levels available through private health plans or other payers. Moreover, beneficiary co-insurance requirements could influence which products are recommended by physicians and selected by patients. There is no assurance that any drug that we develop or sell will be covered by drug plans participating under the Medicare Part D program or, if covered, what the terms of any such coverage will be, or that the drugs will be reimbursed at amounts sufficient to make the drug cost effective.  To the extent that private insurers or managed care programs follow Medicare coverage and payment developments, the adverse effects of lower Medicare payment may be magnified by private insurers adopting similar lower payment.  New federal or state drug payment changes or healthcare reforms in the United States and in foreign countries may be enacted or adopted in the future that could further lower payment for our products.

Our ability to commercialize our product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish appropriate reimbursement levels for the cost of our products and related treatments Third-party payors are increasingly challenging the prices charged for medical products and services.  Also, the trend toward managed health care in the United States, which could significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may result in lower prices for our product candidates or exclusion of our product candidates from reimbursement programs.  The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially and adversely affect our results of operations.
 
Another development that may affect the pricing of drugs is regulatory action regarding drug reimportation into the United States.  The Medicare Prescription Drug, Improvement and Modernization Act of 2003, which became law in December 2003, requires the Secretary of the U.S. Department of Health and Human Services (the “Secretary”) to promulgate regulations allowing drug reimportation from Canada into the United States under certain circumstances.  These provisions will become effective only if the Secretary certifies that such imports will pose no additional risk to the public’s health and safety and will result in significant cost savings to consumers.  To date, the Secretary has made no such finding, but he could do so in the future.  Proponents of drug reimportation may also attempt to pass legislation that would remove the requirement for the Secretary’s certification or allow reimportation under circumstances beyond those anticipated under current law.  If legislation is enacted, or regulations issued, allowing the reimportation of drugs, it could decrease the reimbursement we would receive for any products that we may commercialize, negatively affecting our anticipated revenues and prospects for profitability.

 
20

 

If physicians, patients and customers do not accept the products that we may develop, our ability to generate product revenue in the future will be adversely affected.

The product candidates that we may develop may not gain market acceptance among physicians, healthcare payors, patients, customers and the medical community.  This will adversely affect our ability to generate revenue.  Market acceptance of and demand for any product that we may develop will depend on many factors, including: our ability to provide acceptable evidence of safety and efficacy; convenience and ease of administration; prevalence and severity of adverse side effects; cost effectiveness; effectiveness of our marketing strategy and the pricing of any product that we may develop; our competitors’ sales and marketing activities; publicity concerning our products or competitive products; and our ability to obtain third-party coverage or reimbursement.

The cost of defending against product liability claims brought against us can be costly and time consuming, and may harm our business.
 
Product liability claims brought against the Company could prevent or interfere with our product commercialization efforts.  Interference can be filed by other inventors/licensees if they believe they have intellectual property covering any part of the discovery and development of our therapeutic product.  Such interference can delay the product development.  We currently have no obvious interference and do not anticipate any, but unforeseen events can occur, leading to delays, or even block of developing a product.  Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity or reduced acceptance of our products in the market.
 
If we are not able to protect and control our unpatented trade secrets, know-how and other technological innovation, we may suffer competitive harm.
 
We also rely on proprietary trade secrets and unpatented know-how to protect our research and development activities, particularly when we do not believe that patent protection is appropriate or available.  However, trade secrets are difficult to protect.  We will attempt to protect our trade secrets and unpatented know-how by requiring our employees, consultants and advisors to execute a confidentiality and nonuse agreement.  We cannot guarantee that these agreements will provide meaningful protection, that these agreements will not be breached, that we will have an adequate remedy for any such breach, or that our trade secrets will not otherwise become known or independently developed by a third party.  Our trade secrets, those of our Joint Venture and those of our present or future collaborators that we utilize by agreement, may become known or may be independently discovered by others, which could adversely affect the competitive position of our product candidates.
 
We may incur substantial costs as a result of litigation or other proceedings to enforce our patents, defend against third-party patents, invalidate third-party patents or license third-party intellectual property.
 
We may not have rights under some patents or patent applications that may cover technologies that we use in our research, drug targets that we select, or product candidates that we seek to develop and commercialize.  Third parties may own or control these patents and patent applications in the United States and abroad.  These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages.  Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.  We or our collaborators therefore may choose to seek, or be required to seek, a license from the third-party and would most likely be required to pay license fees or royalties or both.  These licenses may not be available on acceptable terms, or at all.  Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property.  Ultimately, we could be prevented from commercializing a product or forced to cease some aspect of our business operations as a result of patent infringement claims, which could harm our business.
 
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries.  Although we are not currently a party to any patent litigation or any other adversarial proceeding, including any interference proceeding declared before the United States Patent and Trademark Office, regarding intellectual property rights with respect to our products and technology, we may become so in the future.  We are not currently aware of any actual or potential third party infringement claim involving our products.  The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial.  The outcome of patent litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of the adverse party, especially in biotechnology related patent cases that may turn on the testimony of experts as to technical facts upon which experts may reasonably disagree.  Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources.  If a patent or other proceeding is resolved against us, we may be enjoined from researching, developing, manufacturing or commercializing our products without a license from the other party and we may be held liable for significant damages.  We may not be able to obtain any required license on commercially acceptable terms or at all.
 
Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could harm our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant time from management.

 
21

 

If we are unable to protect our intellectual property rights, our competitors may develop and market products with similar features that may reduce demand for our potential products.
 
The following factors are important to our success: receiving patent protection for our product candidates; preventing others from infringing on our intellectual property rights; and maintaining our patent rights and trade secrets.
 
We will be able to protect our intellectual property rights in patents and trade secrets from unauthorized use by third parties only to the extent that such intellectual property rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.

Because issues of patentability involve complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty.  Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject to interference or reexamination proceedings in the U.S. Patent and Trademark Office.  Foreign patents may be subject to opposition or comparable proceedings in corresponding foreign patent offices, and such proceedings could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of the patent or patent application.  In addition, such interference, reexamination and opposition proceedings may be costly.  Thus, any patents that we own or license from others may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third-party receiving the patent rights sought by us, which in turn could affect our ability to market a potential product to which that patent filing was directed.  Our pending patent applications, those that we may file in the future, or those that we may license from third parties may not result in patents being issued.  If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology.  Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed.  Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties.  For example, compulsory licenses may be required in cases where the patent owner has failed to “work” the invention in that country, or the third-party has patented improvements.  In addition, many countries limit the enforceability of patents against government agencies or government contractors.  In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent.  Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection, which makes it difficult to stop infringement.
 
In addition, our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the compounds that are used in their products. Any litigation to enforce or defend our patent rights, even if we prevail, could be costly and time-consuming and would divert the attention of management and key personnel from business operations.
 
We will also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position.  We will seek to protect this information by entering into confidentiality agreements with parties that have access to it, such as strategic partners, collaborators, employees and consultants.  Any of these parties may breach these agreements and disclose our confidential information or our competitors might learn of the information in some other way.  If any trade secret, know-how or other technology not protected by a patent were disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.
 
The patent process is exceedingly time consuming and the loss of patent protection may cause a reduction or loss of future revenue stream.
 
The patent process is exceedingly time consuming.  The time consumed by development, regulatory review, and creation of a market for a drug may significantly intrude into the finite patent life of the particular drug. Loss of patent protection ultimately enables generic versions of the drug to enter the market, which will significantly adversely impact future revenue streams of the Company.  An initially profitable drug may thus become significantly less profitable.

 
22

 

If we are unable to contract with third parties for the synthesis of active pharmaceutical ingredients required for preclinical testing or for the necessary components for our Lateral Flow Products, we may be unable to develop or commercialize our products.

The manufacturing of sufficient quantities of new product candidates is a time-consuming and complex process.  We have no experience or capabilities to conduct the manufacture of any of our product candidates.  In order to successfully develop our product candidates, we need to contract or otherwise arrange for the necessary manufacturing.  There are a limited number of manufacturers that operate under the FDA’s good manufacturing practices capable of manufacturing for us. We depend upon third parties for the manufacture of products and this dependence may adversely affect our ability to develop and deliver such products on a timely and competitive basis.  If we are unable to engage or retain third-party manufacturers on a long-term basis or on commercially acceptable terms, our product candidates may not be developed as planned, and the development of our product candidates could be delayed.  Our reliance on contract manufacturers also exposes us to the following risks:

 
·
contract manufacturers may encounter difficulties in achieving volume production, quality control and quality assurance, and also may experience shortages in qualified personnel.  As a result, our contract manufacturers might not be able to meet our clinical schedules or adequately manufacture our products in commercial quantities when required;

 
·
switching manufacturers may be difficult because the number of potential manufacturers is limited.  It may be difficult or impossible for us to find a replacement manufacturer quickly on acceptable terms, or at all;

 
·
our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store or distribute our products; and

 
·
drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with good manufacturing practices and other government regulations and corresponding foreign standards.  We do not have control over third-party manufacturers’ compliance with these regulations and standards.
 
Our current dependence upon third parties for the manufacture of our products may harm our profit margin, if any, on the sale of our future products and our ability to develop and deliver products on a timely and competitive basis.
 
The manufacturing processes for our product candidates have not been validated at the scale required for commercial sales.  Delays in scale-up to commercial quantities and any change at the site of manufacture could delay clinical trials, regulatory submissions and ultimately the commercialization of our products.

If our third-party manufacturers’ facilities do not follow current good manufacturing practices, our product development and commercialization efforts may be harmed.
 
There are a limited number of manufacturers that operate under the FDA’s and European Union’s good manufacturing practices regulations and are capable of manufacturing products. Third-party manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages of qualified personnel.  A failure of third-party manufacturers to follow current good manufacturing practices or other regulatory requirements, or to document their adherence to such practices, may lead to significant delays in the availability of products for commercial use or clinical study, the termination of, or hold on, a clinical study, or the delay or prevention of filing or approval of marketing applications for our products.  In addition, we could be subject to sanctions, including fines, injunctions and civil penalties.  Changing manufacturers may require FDA approval or additional clinical trials and the revalidation of the manufacturing process and procedures in accordance with FDA mandated current good manufacturing practices.  This revalidation may be costly and time consuming.  If we are unable to arrange for third-party manufacturing of our products on commercially reasonable terms, we may not be able to complete development or marketing of our products.

 
23

 
 
RISKS RELATED TO CAPITAL STRUCTURE
 
There is no established public trading market for our common stock, and the failure to establish one will adversely affect the ability of our investors to sell their securities in the public market.
 
At present, there is no active trading market for our securities, and there can be no assurance that a trading market will develop. Our common stock, however, is traded on the OTC Bulletin Board.  The National Association of Securities Dealers (the “NASD”) has enacted changes that limit quotations on the OTC Bulletin Board to securities of issuers that are current in their reports filed with the SEC. The OTC Bulletin Board is an inter−dealer, over-the-counter market that provides significantly less liquidity than the NASD’s automated quotation system (the “NASDAQ Stock Market”).  Unlike quotes for the NASDAQ Stock Market, quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers.  Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price, or at all.

Factors which may adversely affect market prices of our common stock.
 
Market prices for our common stock will be influenced by a number of factors, including:
 
 
·
the issuance of new equity securities pursuant to a future offering or acquisition;

 
·
data from clinical trials;

 
·
developments related to the FDA approval process;

 
·
sales of our stock by our current stockholders;

 
·
developments in our patent rights;

 
·
departures of key personnel;

 
·
the addition or termination of research or development programs;

 
·
the entry into collaborative agreements;
 
 
·
changes in interest rates;
 
 
·
competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
 
·
variations in quarterly operating results;

 
·
changes in financial estimates by securities analysts;
 
 
·
the depth and liquidity of the market for our common stock;
 
 
·
investor perceptions of our company and the medical device industry generally; and
 
 
·
general economic and other national conditions.

 
24

 

Shares eligible for future sale may adversely affect the market price of our common stock.
 
During the fiscal year ended September 30, 2007, we issued 104,000,000 shares of our common stock and 12,300,000 warrants to purchase our common stock (or 26,000,000 shares and 3,075,000 warrants on a post-split basis) to investors through private placement transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”).  The sale, or availability for sale, of substantial amounts of this stock could adversely affect the future market price of our common stock and could impair our ability to raise additional capital through the sale of our equity securities or debt financing. Additionally, such sales may make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable, or at all.
 
Our common stock is considered a “penny stock” and may be difficult to sell.
 
Our common stock is considered to be a “penny stock” since it meets one or more of the definitions in Rules 15g−2 through 15g−6 promulgated under Section 15(g) of the Securities Exchange Act of 1934. The characteristics that define a “penny stock” include but are not limited to the following:  (i) the stock trades at a price less than $5.00 per share; (ii) the stock is NOT traded on a “recognized” national exchange; (iii) the stock is NOT quoted on the NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) the stock is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues of less than $6.0 million for the past three years.  The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.
 
Additionally, Section 15(g) of the Exchange Act and Rule 15g−2 promulgated thereunder by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.
 
Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.”  Moreover, Rule 15g−9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.  This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives.  Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third-parties or to otherwise dispose of them in the market or otherwise.
 
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
 
We are required and have established and maintain appropriate internal controls over financial reporting which management has asked to be effective as of our fiscal year ended September 30, 2008. Any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations.

Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.
 
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal controls over financial reporting, and attestation of our assessment by our independent registered public accountants.  On December 15, 2006, the SEC extended the compliance date for non-accelerated filers, as defined by the SEC, to provide management’s report on internal controls until the company files an annual report for its fiscal year ending on or after December 15, 2007.  On October 2, 2009, the SEC announced that it intended to further extend the compliance date for non-accelerated filers to file the auditor’s attestation report on internal control over financial reporting until it files an annual report for its first fiscal year ending on or after June 15, 2010.  Accordingly, management has made the required review and assessed the system of internal control over financial reporting to be effective as of our fiscal year end. We may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404.  Failure to achieve and maintain an effective internal control environment could harm our operating results and could cause us to fail to meet our reporting obligations.  Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. Our auditor’s review of our system and subsequent attestation report will not be performed until the fiscal year ending September 30, 2010. The attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accountants.  If our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.

 
25

 

We do not foresee paying cash dividends in the foreseeable future.
 
We have not paid cash dividends on our stock and do not plan to pay cash dividends on our common stock in the foreseeable future.

Provisions of our certificate of incorporation, bylaws, rights agreement and Nevada law could deter takeover attempts.

Some provisions in our certificate of incorporation and bylaws, as well as the provisions of our rights plan could delay, prevent or make more difficult a merger, tender offer, proxy contest or change of control. Our stockholders might view any transaction of this type as being in their best interest since the transaction could result in a higher stock price than the current market price for our common stock. Any delay or prevention of a merger, tender offer, proxy contest or change of control could cause the market price of our common stock to decline.

Among other things, our certificate of incorporation and bylaws:

 
·
authorize our Board of Directors to issue preferred stock with the terms of each series to be fixed by our Board of Directors;

 
·
permit directors to be removed only for cause; and

 
·
specify advance notice requirements for stockholder proposals and director nominations.

In addition, on September 22, 2009, our Board of Directors approved and adopted an amendment to our Bylaws to adopt Sections 78.378 to 78.3793 of the Nevada Revised Statutes which impose voting restrictions on stockholders acquiring more than 20% of the Registrant’s voting stock (such shares are defined in the Nevada Revised Statutes as “control shares”).  These provisions also authorize our company, at the discretion of our Board of Directors, to call for redemption of the “control shares” at the average price the holder paid for such shares.

Effective June 1, 2009, our board of directors adopted a stockholders’ rights plan, which could result in the significant dilution of the proportionate ownership of any person that engages in an unsolicited attempt to take over our company and, accordingly, could discourage potential acquirers.    On June 22, 2009, Dyva Holding Ltd. filed a Form 13D indicating that it had acquired more than 20% of our outstanding common stock.  This acquisition crossed the stock ownership threshold required to trigger our rights plan. Pursuant to the rights plan, our Board of Directors declared a dividend distribution of one right for each share of common stock. Each right entitles the holder to purchase one one-hundredth of a share of our Series C Preferred Stock at an initial exercise price of $5 per share. The Rights Plan is intended to assure that all of our stockholders receive fair and equal treatment in the event of any proposed takeover of the company and to protect stockholders’ interests in the event the company is confronted with partial tender offers or other coercive or unfair takeover tactics.  Rights become exercisable upon the earlier of (i) ten days following the acquisition by a person or group of 20% or more of our outstanding common stock, and (ii) ten business days after the announcement of a tender offer or exchange offer to acquire 20% or more of the outstanding common stock. The continuing directors (defined as the directors who are not affiliated or associated with an acquiring person) may vote to extend these timeframes in their discretion. If such a person or group acquires 20% or more of the common stock, each right (other than such person’s or group’s rights, which will become void) will entitle the holder to purchase, at an exercise price equal to 50% of the then current trading price of the our common stock.   In the alternative, our Board of Directors may authorize issuance of one share of fully paid common stock for each right. If not redeemed, the rights will expire on June 1, 2014.  Pursuant to the Rights Plan, our Board of Directors voted to extend the distribution date.

 
ITEM 1B
UNRESOLVED STAFF COMMENTS

Not applicable.

 
ITEM 2
PROPERTIES

We currently maintain our corporate office in 18 Technology, Suite 130, Irvine, CA 92618, under a lease through July 31, 2010 at a base monthly rental rate of $4,389.  We lease office space in Nevada under a one year lease for $2,500 paid in advance. We do not own or lease any other property and we do not have a real estate investment policy.
 
 
ITEM 3
LEGAL PROCEEDINGS

On October 29, 2009, pursuant to the authority provided in the Bylaws and pursuant to Nevada Control Share Act ((the “Nevada Act”), we called for redemption of the entire 10,832,876 common share holding of DYVA Management Ltd. and its affiliates (“DYVA”), which such shares represent 46.2% of our total issued and outstanding shares.  Under the Nevada Act, we are entitled to call for redemption of DYVA’s shares at the average price paid by DYVA for its shares, which has been reported by DYVA to be for 833,298 Euros (approximately $1,231,000). On November 13, 2009, DYVA filed a complaint in the United States District Court, District of Nevada for declaratory and injunctive relief to halt the proposed redemption. In addition, the complaint seeks attorneys fees and costs to the extent permitted by law and any further and other relief the Court may deem proper.
 
We may occasionally become subject to legal proceedings and claims that arise in the ordinary course of our business.  It is impossible for us to predict with any certainty the outcome of any disputes that may arise, and we cannot predict whether any liability arising from claims and litigation will be material in relation to our financial position or results of operations.
 
 
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2009.

 
26

 

PART II
 
 
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock has been traded on the OTC Bulletin Board over-the-counter market since November 10, 2006. Effective October 30, 2007, the Company changed its symbol from “QSTG” to “NURX” in connection with the Company’s change in name to NuRx Pharmaceuticals, Inc.  Effective on or about May 9, 2008, the Company changed its symbol from “NURX” to “NUXP” in connection with the one-for-four reverse stock split.

There is little or no trading in our common stock. The following price information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:
 
Quarter Ending(1)
 
High
   
Low
 
October 1, 2007 – December 31, 2007
  $ 4.04     $ 2.00  
January 1, 2008 – March 31, 2008
  $ 4.04     $ 2.20  
April 1, 2008 – June 30, 2008
  $ 4.05     $ 2.10  
July 1, 2008 – September 30, 2008
  $ 2.50     $ 0.30  
October 1, 2008 - December 31, 2008
  $ 1.90     $ 0.25  
Jan. 1, 2009 – March 31, 2009
  $ 1.90     $ 0.05  
April 1, 2009 - June 30, 2009
  $ 0.49     $ 0.10  
July 1, 2009 – September 30, 2009
  $ 0.58     $ 0.10  

(1) All per share information is adjusted to reflect the one-for-four reverse stock split which occurred on May 9, 2008.
 
Holders

As of December 18, 2009, there were approximately 460 holders of record of our common stock. 
 
Dividends

We have not paid any dividends on our common stock to date and do not anticipate that we will be paying dividends in the foreseeable future.
 
Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the Board of Directors may think are relevant.  However, we currently intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.

Equity Compensation Plan Information

The only equity compensation plan approved by our security holders is the 2007 Stock Compensation Plan (the “2007 Plan”).  The Company has also issued equity compensation outside of the 2007 Plan in connection with the services provided by Hunter World Markets for the Company’s private placement of its common stock.

Recent Sales of Unregistered Securities

On October 31, 2007, we issued to Vitae Pharmaceuticals, Inc. 1,756,732 shares of our common stock (on a post-split basis) as a milestone payment in connection with the license agreement that we executed on May 11, 2007, under which we acquired an exclusive, worldwide sublicense to certain compounds and technology for human and veterinary use.

On December 31, 2008 we issued to Vitae Pharmaceuticals, Inc. 50,000 shares of our common stock as a payment in connection with the amendment and restatement of the May 11, 2007 license to cover certain dermatological applications of the compounds.

 
27

 

 
ITEM 6.
SELECTED FINANCIAL DATA.

Not applicable.
 
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Management’s Discussion and Analysis or Plan of Operation. 
 
You should read the information in this Item 7 together with our financial statements and notes thereto that appear elsewhere in this Report. This Report contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements. This discussion and analysis may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under heading “Risk Factors,” and elsewhere in this report.

Overview

NuRx Pharmaceuticals Inc. (“NuRx”) has historically been an early stage R&D biopharmaceutical company with a focus on oncology products (leukemia and lung cancer). The combination of (1) the current suboptimal conditions for new financing of a pure early stage, oncology-focused research and development  biotech company and (2)  the slower than expected  recruitment in our U.S. clinical trials with its resultant delays in delivery of Phase II data has recently caused the company to carefully evaluate options to its current singular focus. We concluded in May 2009 that there was an immediate need to expand our R&D focus to novel oncology targets in collaboration with academic centers as well as re-examine the value of our oncology supportive care neutropenia product. More significantly we determined that we needed to expand our interests to broader areas of life sciences with products that offer a near term revenue stream to support the R&D programs. We examined a number of options in the medical diagnostics arena and ultimately focused on Point-of-Care diagnostics in human and veterinary medicine.

Patient enrollment in clinical trials in the U.S. has been placed on hold while we focus on those clinical trials that are being initiated in India in collaboration with Piramal. The trials which were opened in Mexico were closed and our U.S. clinical trials support team was terminated.
 
On July 30, 2009, we invested $5,000,000 into a newly formed 50/50 joint venture with QuantRx Biomedical Corporation (“QuantRx”).  The joint venture, called QN Diagnostics, LLC (“QN Diagnostics” or “QND”), was formed to bring to fruition a decade of R&D at QuantRx by accelerating the commercialization of innovative Point-of-Care diagnostic tests. The joint venture products will be focused on QuantRx’s proprietary lateral flow and optics technologies (whereby a sample of saliva, urine, or whole blood moves across a solid platform to interact with a reagent to produce colorimetric or other changes that can be measured qualitatively or quantitatively) and Point-of-Care delivery of data through novel and inexpensive readers.  We believe that the combination of QuantRx intellectual property with the capital and management expertise of NuRx will enable a rapid acceleration of product delivery and the near term generation of revenues.  As we continue to evolve and broaden our life sciences focus, the QN Diagnostics joint venture will become a critical part of our health care portfolio.

From our inception in 2001 to May 2007, we were in the business of selling nutritional products. In May 2007, we spun off this nutritional products business and began to pursue a new business plan in the pharmaceuticals industry.   On May 11, 2007, we entered into a license agreement with Vitae Pharmaceuticals, Inc. (“Vitae”), pursuant to which we acquired an exclusive, worldwide sublicense, with the right to grant further sublicenses, to certain compounds and nuclear receptor technology for all human and veterinary use. The principal therapeutic indications for the lead compounds are acute promyelocytic leukemia, acute myeloid leukemia, solid cancers (lung, mesothelioma, adenoid cystic carcinoma, and breast) and chemotherapy-induced neutropenia (low white cell count. The Company paid Vitae an upfront licensing fee of $2,100,000 and $50,000 for its inventory of the licensed compounds. The Company also agreed to issue Vitae 1,756,732 shares of common stock (on a post-split basis), representing 5.66% of our outstanding common stock (after the issuance of these shares) as of the effective date of the license, upon reaching a certain milestone. These shares were issued to Vitae on October 31, 2007, when the Company met this milestone by receiving approval from the Food and Drug Administration (“FDA”) to begin Phase I clinical trials for one of the lead compounds.

We will also be required to pay the existing licensors, on Vitae’s behalf, additional milestone payments if we reach other milestones, including Phase III clinical trials, and upon obtaining FDA marketing approval for a product containing a licensed compound. In addition to the aforementioned fees and milestone payments, we agreed to pay the original licensor of the compounds and Vitae specified revenue percentages of our net sales of products based on the licensed technology. The percentages vary from product to product, but when combined may total as much as 12% of our net sales. We must meet certain development milestones under the original license agreements with the existing licensors in order to maintain the rights to the licensed products.

 
28

 

On December 31, 2008, we entered into an amendment of our May 11, 2007 license with Vitae for the license of additional compounds directed at dermatological therapeutic applications. We agreed to make a cash payment of $125,000 and to issue 50,000 shares of common stock valued at $2.00 per share upon execution of the license amendment. These costs have been charged to expense as in-process research and development for the year ended September 30, 2009.

On March 6, 2009, we entered into a development and commercialization agreement with Piramal Life Sciences, Limited (“Piramal”) with respect to NRX 5183 in India (the “Piramal Agreement”). Piramal is a pharmaceutical company listed on the Indian National Stock Exchange and the Bombay Stock Exchange and which was recently demerged from Piramal Healthcare Limited. Pursuant to the Piramal Agreement, Piramal has the exclusive right to develop, manufacture and exploit the NRX 5183 technology within India at its sole expense. We obtain the clinical data generated by Piramal for use in registration in countries outside of India. Piramal will also reimburse us for development expenses incurred with regard to clinical trials in India prior to March 6, 2009 up to $100,000. This reimbursement has been recorded as a receivable with a corresponding reduction of research & development expenses at September 30, 2009.  Until manufacturing is undertaken by Piramal, we will provide clinical grade drug product to Piramal for use in clinical trials.  We are obligated as sponsor of the initial clinical trial in India for continuing costs which Piramal is obligated to reimburse.  It is anticipated that further trials sponsored by Piramal will be initiated at later dates.

We currently have no source of revenue and have incurred significant losses to date. We have incurred net losses of approximately $15,754,000 for the cumulative period from inception (May 1, 2007) through September 30, 2009. Our losses have resulted principally from costs associated with inbound technology licensing, clinical development expenses, 50% share of loss for our QND joint venture, general and administrative activities and costs related to our financing in May 2007. As a result of planned expenditures for costs related to the maintenance of our intellectual property, support of the clinical trials activities conducted by our development partner Piramal in India, general and administrative costs, and development and commercialization activities of the lateral flow products through QND, we expect to incur additional operating losses for the foreseeable future.
 
Going Concern

Our management believes that the successful growth and operation of the Company’s business is dependent upon its ability to obtain adequate sources of debt or equity financing to:

 
·
wind down the U.S. clinical trials and adequately support its clinical development partner in India; and
 
·
fund its share of future additional development costs of the QND joint venture; and
 
·
manage or control working capital requirements by further reducing operating expenses.

There can be no assurance that we will be successful in achieving the long-term plans as set forth above, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue in the long-term as a going concern. Our continuation as a going concern is dependent on its ability to obtain additional financing to fund operations, implement its business model, and ultimately, to attain profitable operations.  We intend to raise additional financing to fund its operations through various means, including equity or debt financing, funding from a corporate partnership or licensing arrangement or any similar financing. However, there is no assurance that sufficient financing will be available or, if available, on terms that would be acceptable to the Company.

The financial statements accompanying this Annual Report on Form 10-K have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and settlement of obligations in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.  The report from our independent registered public accounting firm states that there is substantial doubt about the Company’s ability to continue as a going concern.
 
Private Placements
 
In May through June 2007, the Company raised approximately $20,500,000 from a small group of accredited investors from the sale of 41,000,000 shares of common stock at a price of $.50 per share in a private placement offering.  As adjusted for the 1-for-4 reverse stock split that took place in May 2008, this represents the sale of 10,250,000 shares of common stock at a price of $2.00 per share.  Pursuant to the terms of the private placement, these investors had certain anti-dilutive price protections until July 18, 2008.
 
Hunter World Markets, Inc. acted as the exclusive placement agent in the private placement offering, and received a fee of $2,012,500 (approximately 10% of the gross proceeds) and two six-year warrants 3,075,000 shares of the Company’s common stock at an exercise price of $4.00 per share on a post-split basis. These warrants expire in 2013. Hunter World Markets, Inc. also loaned us $125,000 at an interest rate of 6% per annum. This loan together with accrued interest and a loan fee of $12,500 was repaid from the proceeds of the private placement.
 
In connection with the private offering, stockholders who had acquired our common stock prior to April 27, 2007 canceled an aggregate 1,939,750 shares of common stock on a post-split basis in consideration for an aggregate amount of $750,000.

During the period between May 30, 2007 and June 27, 2007, we sold an aggregate 250,000 shares of our common stock at a price of $2.00 per share on a post-split basis and received aggregate proceeds of $500,000. In connection with the aforementioned sales, Hunter World Markets received a commission of 5% on half the gross proceeds and received a six-year warrant to purchase common stock equal to 75,000 shares at an exercise price of $4.00 per share on a post-split basis.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates are described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies to the Notes to Financial Statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources, and evaluate our estimates on an ongoing basis. These estimates are reviewed by other members of financial management before being recorded into the accounting records.  Actual results could differ from those estimates under different assumptions or conditions.

 
29

 

Development Stage Enterprise
 
We are a development stage enterprise and are devoting substantially all of our present efforts to research and development activities in drug development activities and in prototype development for our lateral flow technologies through our QN Diagnostics joint venture. All losses accumulated are considered as part of our development stage activities.
 
Research and Development Costs
 
Although we believe that our research and development activities and underlying technologies have continuing value, the amount of future benefits to be derived from them is uncertain. Furthermore, our development activities are principally in the early clinical stage. Research and development costs are therefore expensed as incurred.

Share-Based Compensation
 
Share-based payments to employees, directors and consultants, including grants of employee stock options, are recognized in the statement of operations based on their fair values.  Fair values are determined at the date of each option grant using the Black-Scholes method.  Because our common shares trade so infrequently and the quoted price of the shares is not indicative of fair value, through December, 2008, the stock price used for purposes of these computations was based upon a value of $2.00 per share on a post-split basis, the share price paid by the purchasers in the April and May 2007 private placements.   Beginning in March 2009 with the option re-pricing, a 90 day average price share has been used.  It is the policy of the Board of Directors to grant stock options at not less than their fair value.
 
In-Process Research and Development
 
Share-based milestone payments made pursuant to the license Agreement with Vitae Pharmaceuticals, Inc. during the fiscal years ended September 30, 2009 and 2008 have been expensed in the Statement of Operations as in-process research and development costs consistent with the treatment of the cash payments to Vitae upon initiation of the license during the fiscal year ended September 30, 2007. The fair value of the stock-based payments was based upon a value of $2.00 per share on a post-split basis, the share price paid by the purchasers in the April and May 2007 private placements.  

Results of Operations

On August 6, 2009, we suspended patient accruals under all four active U.S. clinical trials for both lead compounds in order to reserve cash for other diversification opportunities, and to await preliminary data from patients already accrued and planned clinical trials in India.  Accrual for the Mexico clinical trials was also suspended and the single open site in Mexico was closed.  Aggregate U.S. Patients accrued and active sites at September 30, 2009 were as follows:

 
·
NRX 4204 Phase I/II for solid tumor indications, at one site in the U.S. with 19 patients enrolled
 
·
NRX 4204 Phase II for Mesothelioma at two sites in the U.S. with six patients enrolled
 
·
NRX 4204 Phase II for Non-Small Cell Lung Cancer (“NSCLC”) at four sites in the U.S. with 13 patients enrolled

As of September 30, 2009, we had a single active clinical trial for one lead compound for NRX 5183 Phase II for Relapsed Acute Promyelocytic Leukemia (“APL”) at five sites in India with one patient enrolled.

As additional cost cutting measures  implemented since August 6, 2009, we terminated our U.S. clinical trials support staff on September 30, 2009 and undertook further reductions in the number of  patent cases in our intellectual property portfolio we are actively prosecuting and maintaining, limiting legal and patent annuity expenditures to the most promising lead compounds.

Both the time required and costs we may incur in order to commercialize a drug candidate that would result in material net cash inflow are subject to numerous variables, and hence, we are unable at this stage of our development to forecast useful estimates. Variables that make estimates difficult include the number of clinical trials we may undertake, the number of patients needed to participate in the clinical trials, patient recruitment uncertainties, trial results as to the safety and efficacy of our product, and uncertainties as to the regulatory agency response to our trial data prior to receipt of marketing approval. Moreover, the FDA or other regulatory agencies may suspend clinical trials if we or an agency believes patients in the trial are subject to unacceptable risks, or find deficiencies in the conduct of the clinical trial. Delays or rejections may also occur if governmental regulation or policy changes during our clinical trials or in the course of review of our clinical data. Due to these uncertainties, it is not possible to give accurate and meaningful estimates of the ultimate cost to bring our products to market, the timing of costs, completion of our program and the period during which material net cash inflows will commence.

 
30

 
 
Year Ended September 30, 2009 Compared to Year Ended September 30, 2008

General and Administrative Expenses.

General and administrative (“G&A”) expenses were approximately $2,147,000 during the year ended September 30, 2009, as compared to approximately $1,934,000 incurred during the year ended September 30, 2008 or an increase of approximately $213,000. General and administrative expenses consist primarily of employee compensation and legal costs involved in our regulatory filings and legal costs incurred in connection with general corporate matters, adoption of a Stockholder Rights Plan and other contracting matters. G&A costs also include insurance, payroll costs and benefits for all employees, costs related to Board meetings and share-based compensation expense related to option issuances to Board members and general and administrative employees and consultants. The approximately $213,000 net increase in total G&A expenses, resulted from an aggregate of approximately $671,000 cost increases, offset by approximately $458,000 in cost reductions. The approximately $671,000 in cost increases consisted primarily of approximately $271,000 in legal fees related to formation of the QND joint venture, adoption of the Stockholder Rights Plan, contracting and related regulatory filings, $192,000 in compensation to independent directors based on a compensation plan adopted in the second quarter of 2008 including (independent director compensation was terminated effective October 1, 2009 other than hourly consulting fees to the Executive Chairman), $119,000 in share-based compensation including the effect of newly issued options during the year and the options re-pricing in March 2009, and $89,000 in G&A salaries.  These cost increases were offset by approximately $458,000 in expense reductions consisting of reductions of approximately $330,000 from the termination of the consulting contract with an affiliate in October, 2008, $125,000 from the termination of our investor relations firm in the fourth quarter of 2008, and $3,000 in other net cost reductions.

Research and Clinical Development Expenses.

Research and clinical development (“R&D”) expenses were approximately $2,899,000 during the year ended September 30, 2009, as compared to approximately $5,816,000 incurred during the year ended September 30, 2008 or a decrease of approximately $2,917,000.

R&D expenses for the years ended September 30, 2009 and 2008 consist primarily of costs involved in the following activities:
 
 
·
Manufacture of the intermediates, API and clinical grade drug product for the Company’s two lead compounds for use in clinical trials;

 
·
Regulatory affairs activities including:

 
o
regulatory filings including protocol submissions to governmental bodies in and outside of the United States with respect to clinical trials,

 
o
regulatory filings including protocol submissions to governing ethics committees for proposed clinical trial sites in and outside of the United States including negotiation of related contracts;

 
·
Continuation of the Phase I clinical trial for NRX 4204 in the United States;

 
·
Costs of readying and initiating the Phase II clinical trials for NRX 5183 in India, Mexico, and the U.S;

 
·
Patient and data management activities for active clinical trials; and

 
·
Costs of readying and initiating Phase II clinical trials in NSCLC and Mesothelioma for NRX 4204 in the United States.
 
R&D costs also include payroll costs of R&D employees, costs of third party consultants, legal costs related to maintenance of the patent portfolio, including patent annuity payments, in-process R&D costs related to the share-based license amendment payment under the Vitae license and share-based compensation costs.

 
31

 

During the year ended September 30, 2009, we recognized a $100,000 receivable and an offsetting reduction in clinical trials related research and development expenses for the reimbursement to us under the Piramal Agreement.

Our R&D expenses for the year ended September 30, 2009 as compared to the year ended September 30, 2008 were related to the following activities:

  
 
  
Year Ended
September 30,
(in thousands)
  
   
2009
   
2008
 
Direct clinical trials costs, net of reimbursement receivable (2009)
 
$
671
   
$
454
 
Drug development and manufacturing
   
758
     
682
 
R&D compensation, including share based compensation
   
779
     
522
 
In-process R&D costs
   
225
     
3,513
 
Other R&D costs
   
466
     
645
 
Total
 
$
2,899
   
$
5,816
 

Direct clinical trial costs increased by approximately $217,000 compared to the year ended September 30, 2008. The increase is due principally to the initiation of the U.S. clinical trials for NRX 5183, net of a $100,000 reimbursement receivable for India clinical trials costs by Piramal.  Drug development and manufacturing costs increased approximately $76,000, primarily attributable to readying sufficient quantities of GMP drug product for NRX 4204 and NRX 5183 for clinical trials.  R&D compensation costs increased approximately $257,000 as a result of an increase in staff and share-based compensation (primarily attributable to the options re-pricing in March 2009). In-process R&D costs decreased $3,288,000 as a result of a one-time share-based payment upon achievement of an investigational new drug milestone in the year ended September 30, 2008. Other R&D costs decreased by $179,000, related primarily to the continuing reduction in legal costs and annuity payments on the licensed technology portfolio as a result of eliminating non-critical cases from the portfolio.

Loss from QN Diagnostics, LLC Joint Venture

We reported $464,755 on the equity method for our 50% share of the net loss incurred by QND for the period from July 30, 2009 (its inception) through September 30, 2009.

Interest Income.

Interest income of $51,600 for the year ended September 30, 2009 consisted primarily of income from certificates of deposits and savings, and $411,000 for the year ended September 30, 2008 from savings and treasury bills.   The decrease was due to lower cash balances and lower interest rate yields in the year ended September 30, 2009.

Cancer Therapeutics

We had no revenues and we do not anticipate that we will derive any revenues from either product sales or licensing from clinical development of our cancer therapeutic lead compounds during the foreseeable future. We agreed to pay Allergan (and any cross licensors), the original licensor of the compounds discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations  Overview”, and Vitae specified revenue percentages of the Company’s net sales of products based on the licensed technology. The percentages vary from product to product, but when combined may total as much as 12% of the Company’s net sales. The Company must meet certain development milestones under the original license agreements with the existing licensors in order to maintain the rights to the licensed products.
 
Point-of-Care Diagnostics

Our QN Diagnostics joint venture with QuantRx is expected to begin generating revenues during our next fiscal year ending September 30, 2010, although we expect to incur overall losses for this period.  Revenues are expected to be generated from manufacturing of lateral flow products for third parties, manufacturing and sale of proprietary lateral flow products, and from licensing.  QN Diagnostics is obligated under a license for certain optics technology to pay royalties to the licensor of two percent (2%) of net sales on lateral flow products incorporating that technology.

 
32

 

Year Ended September 30, 2008 Compared to Year Ended September 30, 2007

A comparative analysis of fiscal 2008 with fiscal 2007 is not presented here since the 2007 year included seven months where we had no operations and five months of primarily organizational activities.

General and Administrative

Our G&A expenses for the fiscal year ended September 30, 2008, totaling $1.9 million, consisted primarily of costs involved in building and establishing our system of internal control over financial reporting, budgeting, quarterly and annual regulatory filings and related review, audit and legal costs, including the implementation of the one-for-four reverse stock split in May 2008.  G&A costs also include payroll costs of general and administrative employees, benefits costs for all employees, costs related to Board meetings and share-based compensation expense related to option issuances to Board members and general and administrative employees and consultants.

During the year ended September 30, 2008, we added three new independent directors to our Board of Directors.

Research & Development

Research and development (“R&D”) activities for the year ended September 30, 2008 consisted primarily of costs involved in the following activities:
 
 
·
Identifying, negotiating and consummating relationships for the manufacture of the clinical grade drug product for the Company’s two lead compounds for use in clinical trials;

 
·
Regulatory affairs activities including:
 
o
grant by the FDA of the IND and initiation of a Phase I clinical trial for NRX 194204,
 
o
re-activation by the FDA for the IND and initiation of Phase II clinical trial for NRX 195183,
 
o
regulatory filings including protocol submissions with governmental bodies in India and Mexico with respect to clinical trials,
 
o
regulatory filings including protocol submissions with governing ethics committees for proposed clinical trial sites in India and Mexico, including negotiation of related contracts; and

 
·
Patient and data management activities for clinical trials.

R&D costs also included payroll costs of R&D employees, costs of third party consultants, legal costs related to maintenance of the patent portfolio, including patent annuity payments, in-process R&D costs related to the share based milestone payment under the Vitae license and share-based compensation costs related to stock and option grants to R&D employees and consultants.

Our R&D expenses for the years ended September 30, 2008 and 2007 are summarized as follows:

  
 
  
Year Ended
September 30,
(In thousands)
  
   
2008
   
2007
 
Direct clinical trials costs
 
$
454
   
$
18
 
Drug development and manufacturing
   
682
     
30
 
R&D compensation, including share based compensation
   
522
     
186
 
In-process R&D costs
   
3,513
     
2,150
 
Other R&D costs
   
645
     
187
 
Total
 
$
5,816
   
$
2,571
 

Fiscal year ended September 30, 2007

There were no substantial operations during our fiscal year ended September 30, 2007, as activities consisted primarily of disposition of the previous nutritional products business and completion of a plan of reorganization in May 2007, including a series of private placements, a change in directors and management and redemption of common shares of controlling shareholders prior to May 2007.

 
33

 

Our pharmaceutical products development activities for the fiscal year ended September 30, 2007 consisted primarily of consummating the license agreement with Vitae and completing the acquisition and transfer of the patents, patent applications, compounds and related materials, securing leased premises in which to conduct our research and development activities, and submission of an application for an IND with the FDA for our compound for the treatment of solid cancers (NRX194204), which was granted on October 31, 2007.  The initial Scientific Advisory Board was also established.

Revenues
 
We have had no revenues related to our new pharmaceuticals business and we do not anticipate that we will derive any revenues from either product sales or licensing during the foreseeable future.  We have no research and development co-development or other agreements, which provide for future revenue or obligations to transfer rights to any of our intellectual property to third parties.  We have agreed to pay Allergan (and any cross licensors), the company that originally licensed the compounds to Vitae, and Vitae up to an aggregate of 12% of future net sales of products based on the licensed technology, such specific percentage to be determined according to the specific compound generating the revenue, the geographic region of exploitation, and certain other factors.

Liquidity

As an early stage clinical development company, we have not generated any revenues from operations to meet operating expenses, and have historically financed operations through issuances of equity securities.

We held approximately $1.9 million in cash and cash equivalents at September 30, 2009 in comparison to $11.3 million in cash and cash equivalents at September 30, 2008.  The decrease in cash and cash equivalents for the year ended September 30, 2009 of approximately $9.4 million was primarily caused by the investment in QND and the cash loss from operations. There were no significant cash flows from financing or other investing activities during the year.

Subsequent to September 30, 2009, we have called for the redemption of certain shares representing 46.2% of the issued and outstanding common shares of the Company at a cost of approximately $1.2 million.  (On November 13, 2009, the holder of such shares filed a complaint in U.S. District Court in Nevada for declaratory and injunctive relief from such redemption.  See “Risk Factors”).  If completed, the redemption would significantly deplete the cash available for operations.

The QN Diagnostics business is also in its early stage and may require additional funding to complete the development and launch of its initial products, which both we and our venture partner are mutually obligated to provide.

As a result, management believes that given the current economic environment, the expected $1.2 million for share redemption, and the continuing need to strengthen the Company’s cash position, there is substantial doubt about its ability to continue as a going concern.  The Company continues to actively pursue various funding options, including equity offerings, debt financings and business combinations.  There can be no assurance that we will be successful in its efforts to raise additional capital.
 
Management believes that the successful growth and operation of the Company’s business is dependent upon its ability to do any or all of the following:

 
·
obtain adequate sources of debt or equity financing to (i) wind down the U.S. clinical trials and adequately support its clinical development partner in India; and (ii) fund its share of future additional development costs of the QND joint venture; and

 
·
manage or control working capital requirements by further reducing operating expenses.

There can be no assurance that the Company will be successful in achieving its long-term plans as set forth above, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue in the long-term as a going concern.

Capital Resources

The Company has no significant planned capital expenditures for the fiscal year ending September 30, 2010.

 
34

 

Off-Balance Sheet Arrangements

We do not engage in trading activities involving non-exchange traded contracts. In addition, we have no financial guarantees, debt or lease agreements or other arrangements that could trigger a requirement for an early payment or that could change the value of our assets.
 
Joint Venture
 
On July 30, 2009, we formed a 50/50 joint venture with QuantRx Biomedical Corporation called QN Diagnostics, LLC where we invested $5.0 million cash and QuantRx contributed its lateral flow and optics intellectual property for the joint development of point of care diagnostic products for human, forensic and veterinary use valued at approximately $5.5 million.  It is anticipated that this initial capital investment will be sufficient to fund the planned operations of QN Diagnostics through cash flow; however, there can be no assurance that additional funds will not be required.  Both we and QuantRx share jointly in the obligation to raise additional capital if needed, although QuantRx is obligated to provide the first $700,000 of any such funds.

 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
 
 
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K.
 
   
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.
 
 
ITEM 9A.
CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Limitations are inherent in all control systems, so no evaluation of controls can provide absolute assurance that all control issues and any fraud within the company have been detected.
 
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date.
 
As required by Securities and Exchange Commission Rule 13a-15(c), we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our system of internal control over financial reporting as of the end of the year covered by this Report.  The Company utilizes the framework established by the Committee on Sponsoring Organizations (COSO) as the framework for its system of internal controls.  Management has assessed the system of internal control over financial reporting to be effective.

There was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15(d) under the Securities Exchange Act of 1934 that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 
35

 
 
 
ITEM 9B.
OTHER INFORMATION

Not applicable.
 
PART III

 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this item is incorporated by reference to the material responsive to this item contained in our 2010 Proxy Statement.

 
ITEM 11.
EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the material responsive to this item contained in our 2010 Proxy Statement.
 
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the material responsive to this item contained in our 2010 Proxy Statement.
 
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the material responsive to this item contained in our 2010 Proxy.
 
 
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference to the material responsive to this item contained in our 2010 Proxy Statement.
 
PART IV
 
 
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following documents are included as part of this Annual Report on Form 10-K:
 
Financial Statements:

   
Page
     
Report of Independent Registered Public Accounting Firm
 
F-2
Balance Sheets
 
F-3
Statements of Operations
 
F-4
Statement of Stockholders' Equity
 
F-5
Statements of Cash Flows
 
F-6
Notes to Financial Statements
 
F-7
 
 
36

 

Exhibit Number
 
Description
     
2.1
 
Contribution Agreement, by and between the Company and QuantRx Biomedical, Inc., dated July 30, 2009.(1)
     
3.1
 
Amended and Restated Articles of Incorporation.(2)
     
3.2
 
Certificate of Designation.(2)
     
3.3
 
Certificate of Amendment to the Certificate of Designation.(2)
     
3.4
 
Certificate of Amendment to the Amended and Restated Articles of Incorporation, dated April 27, 2007.(3)
     
3.5
 
Certificate of Amendment to the Amended and Restated Articles of Incorporation, dated October 23, 2007.(4)
     
3.6
 
Amended and Restated Bylaws.(5)
     
4.1
 
Registration Rights Agreement as of May 16, 2007 between the Company and the Purchasers named therein.(6)
     
4.2
 
Placement Agent Warrant issued to Hunter World Markets, Inc. on May 16, 2007.(6)
     
4.3
 
Lock-up Agreement dated as of May 16, 2007, by and among the Company and the shareholders, Santa Monica Capital Partners II, LLC, Dr. Parkash Gill, Dr. Parkash Gill, custodian for Dhillon Gill, Dr. Parkash Gill, custodian for Noorean Gill, Harin Padma−Nathan, Marc Ezralow, David Ficksman, Roshantha Chandraratna.(7)
     
4.4
 
Warrant issued to Investor Media Group, Inc., dated July 20, 2007. (8)
     
4.5
 
Placement Agent Warrant issued to Hunter World Markets, Inc. on June 29, 2007. (9)
     
4.6
 
Stockholder Rights Agreement, dated as of June 1, 2009, between NuRx Pharmaceuticals, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent.(10)
     
4.7
 
Certificate of Designation of Series C Preferred Stock, as filed with the Secretary of State for the State of Nevada.(10)
     
10.1
 
Asset Purchase Agreement, dated May 31, 2007, by and between Quest Group International, Inc. and Quest Group, LLC. (11)
     
10.2
 
Form of Subscription Agreement, dated April 27, 2007, by and between the Company and the Purchasers named therein.(3)
     
10.3
 
Form of Subscription Agreement dated as of May 16, 2007, by and among the Company and the Purchasers named therein.(6)
     
10.4
 
Form of Subscription Agreement dated as of May 30, 2007, by and among the Company and the Baradaran Revocable Trust.(7)
     
10.5
 
Securities Purchase Agreement dated as of June 25, 2007, by and among the Company and City National Bank, Trustee FBO Harin Padma−Nathan IRA. (9)
     
10.6
 
License Agreement between the Company and Vitae Pharmaceuticals, Inc., dated May 11, 2007.(7) Portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for a confidential treatment.
     
10.7
 
Employment Agreement between the Company and Rosh Chandraratna, dated May 25, 2007.(7)*
     
10.8
 
Employment Agreement between the Company and Harin Padma−Nathan, dated May 31, 2007.(7) *
     
10.9
 
Employment Agreement between the Company and Steven Gershick, dated September 21, 2007.(12) *

 
37

 

10.10
 
Consulting Agreement between the Company and Parkash Gill, dated May 31, 2007.(13)
     
10.11
 
2007 Stock Compensation Plan of Company.(7) *
     
10.12
 
Termination Agreement dated July 20, 2007, by and between Quest Group International, Inc. and Bateman Dynasty, LC.(8)
     
10.13
 
Amendment to Consulting Agreement by and between the Company and SOQ Inc., dated April 15, 2009. (14)
     
10.14
 
Amendment to Employment Agreement by and between the Company and Dr. Harin Padma-Nathan, dated April 15, 2009.(14) *
     
10.15
 
Amendment to Employment Agreement by and between the Company and Dr. Rosh Chandraratna, dated April 15, 2009.(14) *
     
10.16
 
Development and Services Agreement, dated July 30, 2009, by and between QuantRx Biomedical, Inc. and QN Diangnostics, LLC, dated July 30, 2009. (1)
     
10.17
 
Limited Liability Company Agreement of QN Diangnostics, LLC, to which the Company is a party. (1)
     
14.1
 
Code of Ethics. (15)
     
31.1
 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act
     
31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act.
     
32.1
 
Certification of the Chief Executive Officer Pursuant to Section 906, Sarbanes-Oxley Act of 2002
     
32.2
  
Certification of the Chief Financial Officer Pursuant to Section 906, Sarbanes-Oxley Act of 2002

Management contract or compensation plan.

(1)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated August 3, 2009.

(2)
Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed June 3, 2002, File No. 333−89628.
 
 
(3)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated April 30, 2007.
 
 
(4)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated October 29, 2007.
 
 
(5)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated September 28, 2009.

(6)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated May 22, 2007.
 
 
(7)
Incorporated by reference to the Company’s Registration Statement on Form SB-2, dated July 3, 2007.
 
 
(8)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated July 26, 2007.
 
 
(9)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated June 29, 2007.
 
 
(10) 
Incorporated by reference to the Company’s Current Report on Form 8−A, dated June 5, 2009.
   
(11)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated June 8, 2007.
 
 
(12)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated September 21, 2007.
 
 
(13)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated November 9, 2007.

(14)
Incorporated by reference to the Company’s Current Report on Form 8−K, dated April 21, 2009.

(15)
Incorporated by reference to the Company’s Annual Report on Form 10-KSB filed December 28, 2007.

 
38

 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
NURX PHARMACEUTICALS, INC.
 
     
Date: December 29, 2009
   
     
 
By: /s/ Harin Padma−Nathan
 
     
 
Harin Padma−Nathan
 
 
President and Chief Executive Officer
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
         
/s/ Harin Padma−Nathan
 
Director, President and Chief Executive Officer
 
December 29, 2009
Harin Padma−Nathan
 
(Principal Executive Officer)
   
         
/s/ Steven Gershick
 
Chief Financial Officer
 
December 29, 2009
Steven Gershick
 
(Principal Financial and Accounting Officer)
   
         
/s/ Kurt Brendlinger
 
Director
 
December 29, 2009
Kurt Brendlinger
       
         
/s/ Sharyar Baradaran
 
Director and Secretary
 
December 29, 2009
Sharyar Baradaran
       
         
/s/ Rosh Chandraratna
 
Director
 
December 29, 2009
Rosh Chandraratna
       
         
/s/ Marvin Rosenthale
 
Director
 
December 29, 2009
Marvin Rosenthale
       
         
/s/ Carl Lebel
 
Director
 
December 29, 2009
Carl Lebel
       
         
/s/ Evan Levine
 
Director
 
December 29, 2009
Evan Levine        

 
39

 

FINANCIAL STATEMENTS
 
   
Page
     
Report of Independent Registered Public Accounting Firm
 
F-2
Balance Sheets
 
F-3
Statements of Operations
 
F-4
Statement of Stockholders' Equity
 
F-5
Statements of Cash Flows
 
F-6
Notes to Financial Statements
 
F-7

 
F-1

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
of NuRx Pharmaceuticals, Inc.
 
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NuRx Pharmaceuticals, Inc. as of September 30, 2009 and 2008, and the results of its operations and its cash flows for the years ended September 30, 2009 and 2008, and the period from May 1, 2007 (inception) through September 30, 2009, in conformity with accounting principles generally accepted in the United States of America. 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As more fully discussed in Note 1 to the financial statements, the Company may not have sufficient working capital or outside financing available to meet its planned operating activities over the next twelve months.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans regarding these matters are described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Gumbiner Savett Inc,
 
GUMBINER SAVETT INC.
 
December 28, 2009
Santa Monica, California
 
 
F-2

 
 
(a corporation in the development stage)
Balance Sheets

   
September 30, 2009
   
September 30, 2008
 
             
ASSETS
           
             
Cash and cash equivalents
  $ 1,899,752     $ 11,365,646  
Prepaid expenses and other current assets
    128,783       169,882  
Other receivable
    100,000       -  
Total current assets
    2,128,535       11,535,528  
                 
Property and equipment, net of accumulated depreciation and amortization of $25,710 and $11,336, respectively
    66,784       45,098  
                 
Investment in joint venture
    3,535,245       -  
                 
Other investments
    1,000,000       -  
                 
Deposits
    27,093       42,093  
                 
Total assets
  $ 6,757,657     $ 11,622,719  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Accounts payable and accrued expenses
  $ 504,211     $ 181,497  
Due to related party
    -       30,000  
Total current liabilities
    504,211       211,497  
                 
Commitments and contingencies
               
                 
Stockholders' Equity
               
                 
Series A preferred stock, $.001 par value, 1,000,000 shares designated, no shares issued and outstanding
    -       -  
Series B preferred stock, $.001 par value, 500,000 shares designated, no shares issued and outstanding
    -       -  
Series C preferred stock, $.001 par value, 300,000 shares designated, no shares issued and outstanding
    -       -  
Common stock, $.001 par value; 150,000,000 shares authorized, 23,444,234 and 28,394,234 shares issued, respectively
    23,444       28,394  
Additional paid-in capital
    21,947,475       21,640,176  
Accumulated deficit during development stage
    (15,753,673 )     (10,293,548 )
Retained earnings
    36,200       36,200  
                 
Total stockholders' equity
    6,253,446       11,411,222  
                 
Total liabilities and stockholders' equity
  $ 6,757,657     $ 11,622,719  

See Notes to Financial Statements

 
F-3

 

(a corporation in the development stage)
Statements of Operations
For the years ended September 30, 2009 and 2008 and for the period from inception (May 1, 2007) through September 30, 2009

   
2009
   
2008
   
Inception (May 1, 2007)
through September 30,
2009
 
                   
Operating Expenses:
                 
                         
General and administrative (includes share based compensation of $377,243, $258,242 and $701,314,  and related party consulting fees of $30,000, $377,500  and $572,200 respectively)
  $ 2,147,439     $ 1,934,001     $ 4,715,736  
                         
Research and clinical development (includes share based compensation of $75,106, $65,863 and $140,969, related party consulting fees of $140,000, $238,910 and $378,910 respectively, and fair value of shares issued in connection with license amendment, license fee, and milestone payment under technology license of  $100,000, $3,513,000, and $3,613,000, respectively)
    2,899,505       5,816,259       11,287,213  
                         
Share of net loss from joint venture
    464,755       -       464,755  
                         
Total operating expenses
    5,511,699       7,750,260       16,467,704  
Loss from operations
    (5,511,699 )     (7,750,260 )     (16,467,704 )
                         
Interest income (expense):
                       
Interest income
    51,574       411,435       726,656  
Interest expense
    -       -       (12,625 )
Total interest income, net
    51,574       411,435       714,031  
                         
Net Loss
  $ (5,460,125 )   $ (7,338,825 )   $ (15,753,673 )
                         
Loss per common share - basic and diluted
  $ (0.20 )   $ (0.26 )   $ (0.57 )
                         
Weighted average common shares - basic and diluted
    27,568,754       28,250,237       27,539,949  

See Notes to Financial Statements

 
F-4

 

(a corporation in the development stage)
Statement of Stockholders' Equity
For the period from inception (May 1, 2007) through September 30, 2009

                                                                           
Accumulated
       
                                                                           
Deficit
       
                                                   
Additional
                     
During the
       
   
Series A Preferred Stock
   
Series B Preferred Stock
   
Series C Preferred Stock
   
Common Stock
   
Paid-in
   
Treasury Stock
   
Retained
   
Development
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Shares
   
Amount
   
Earnings
   
Stage
   
Total
 
                                                                                     
Balance at October 1, 2006
    -     $ -       -     $ -       -     $ -       2,564,752     $ 2,565     $ 160,485       -     $ -     $ 166,854     $ -     $ 329,904  
Private placement April 27,  2007, 15,750,000 common shares at $0.001 per share
    -       -       -       -       -       -       15,750,000       15,750       -       -       -       -       -       15,750  
                                                                                                                 
Private placement May 16, 2007, 10,000,000 common shares at $2.00 per share
    -       -       -       -       -       -       10,000,000       10,000       19,990,000       -       -       -       -       20,000,000  
                                                                                                                 
Private placement June 25, 2007, 250,000 common shares at $2.00 per share
    -       -       -       -       -       -       250,000       250       499,750       -       -       -       -       500,000  
                                                                                                                 
Private placement fees, reorganization costs and related registration costs, including fair market value of warrants
    -       -       -       -       -       -       -       -       (5,151,228 )     -       -       -       -       (5,151,228 )
                                                                                                                 
Share-based compensation
    -       -       -       -       -       -       12,500       12       65,817       -       -       -       -       65,829  
                                                                                                                 
Fair value of warrants issued in connection with private placement
    -       -       -       -       -       -       -       -       2,988,064       -       -       -       -       2,988,064  
                                                                                                                 
Repurchase of 1,939,750 common shares, May 2007
    -       -       -       -       -       -       -       -       -       (1,939,750 )     (750,000 )     -       -       (750,000 )
                                                                                                                 
Net loss
    -       -       -       -       -       -       -       -       -       -       -       (130,654 )     (2,954,723 )     (3,085,377 )
Balance September 30, 2007
    -       -       -       -       -       -       28,577,252       28,577       18,552,888       (1,939,750 )     (750,000 )     36,200       (2,954,723 )     14,912,942  
                                                                                                                 
Share based compensation
    -       -       -       -       -       -       -       -       324,105       -       -       -       -       324,105  
                                                                                                                 
Fair value of shares issued in connection with milestone payments under technology license (shares valued at  $2.00 per share)
    -       -       -       -       -       -       1,756,732       1,757       3,511,243       -       -       -       -       3,513,000  
                                                                                                                 
Cancellation of treasury stock
    -       -       -       -       -       -       (1,939,750 )     (1,940 )     (748,060 )     1,939,750       750,000       -       -       -  
                                                                                                                 
Net loss
    -       -       -       -       -       -       -       -       -       -       -       -       (7,338,825 )     (7,338,825 )
Balance September 30, 2008
    -       -       -       -       -       -       28,394,234       28,394       21,640,176       -       -       36,200       (10,293,548 )     11,411,222  
                                                                                                                 
Share based compensation
    -       -       -       -       -       -       -       -       452,349       -       -       -       -       452,349  
                                                                                                                 
Fair value of shares issued in connection with amended technology license (shares valued at  $2.00 per share)
    -       -       -       -       -       -       50,000       50       99,950       -       -       -       -       100,000  
                                                                                                                 
Shares redeemed and cancelled
    -       -       -       -       -       -       (5,000,000 )     (5,000 )     (245,000 )     -       -       -       -       (250,000 )
                                                                                                                 
Net loss
    -       -       -       -       -       -       -       -       -       -       -       -       (5,460,125 )     (5,460,125 )
                                                                                                                 
Balance September 30, 2009
    -     $ -       -     $ -       -     $ -       23,444,234     $ 23,444     $ 21,947,475       -     $ -     $ 36,200     $ (15,753,673 )   $ 6,253,446  

See Notes to Financial Statements

 
F-5

 

(a corporation in the development stage)
Statements of Cash Flows
For the years ended September 30, 2009 and 2008, and for the period from inception (May 1, 2007) through September 30, 2009

   
September 30, 2009
   
September 30, 2008
   
Inception (May 1, 2007)
through September 30,
2009
 
                   
Cash flows from operating activities:
                 
                   
Net loss
  $ (5,460,125 )   $ (7,338,825 )   $ (15,753,673 )
                         
Adjustments to reconcile net loss to net cash used in operating activities:
                       
                         
Depreciation and amortization
    14,374       9,954       25,710  
Share-based compensation
    452,349       324,105       842,283  
Fair value of shares issued in connection with license amendment, license fee, and milestone payments under technology license
    100,000       3,513,000       3,613,000  
Share of  loss from operations of joint venture
    464,755       -       464,755  
                         
Changes in operating assets and liabilities:
                       
Deposits
    15,000       (15,000 )     (27,093 )
Prepaid expenses and other current assets
    41,099       (114,050 )     (128,783 )
Other receivable
    (100,000 )     -       (100,000 )
Accounts payable and accrued expenses
    322,714       78,056       540,301  
Due to related parties
    (30,000 )     (6,090 )     (36,090 )
                         
Net cash used in continuing operating activities
    (4,179,834 )     (3,548,850 )     (10,559,590 )
Net cash provided by discontinued operating activities
    -       -       41,146  
Net cash used in operating activities
    (4,179,834 )     (3,548,850 )     (10,518,444 )
                         
Cash flows from investing activities:
                       
                         
Purchase of property and equipment
    (36,060 )     (27,227 )     (92,494 )
Investment in joint venture
    (4,000,000 )     -       (4,000,000 )
Investment in warrants
    (1,000,000 )     -       (1,000,000 )
Issuance of note receivable
    (250,000 )     -       (250,000 )
Collection of note receivable
    250,000       -       250,000  
Net cash used in investing activities
    (5,036,060 )     (27,227 )     (5,092,494 )
                         
Cash flows from financing activities:
                       
                         
Private placements of common shares
    -       -       20,563,000  
Private placement offering costs
    -       -       (2,163,164 )
Proceeds of note receivable
    -       -       125,000  
Repayment of note receivable
    -       -       (125,000 )
Redemption of treasury stock
    (250,000 )     -       (1,000,000 )
                         
Net cash (used in) provided by financing activities
    (250,000 )     -       17,399,836  
Net increase (decrease) in cash and cash equivalents
    (9,465,894 )     (3,576,077 )     1,788,898  
Cash transferred to discontinued operations
    -       -       (166,463 )
Cash and cash equivalents, beginning of period
    11,365,646       14,941,723       277,317  
                         
Cash and cash equivalents, end of period
  $ 1,899,752     $ 11,365,646     $ 1,899,752  
                         
Supplemental disclosure of cash flow information
                       
Cash paid for -
                       
Income taxes
  $ 800     $ 800     $ 1,600  
Interest
  $ -     $ -     $ 12,625  

Non-cash financing activities:

In 2007, the Company incurred $5,151,228 in private placement fees, reorganization costs and related registration costs, which included the issuance of warrants with a fair value of $2,988,064.

See Notes to Financial Statements

 
F-6

 
 
(a corporation in the development stage)
Notes to Financial Statements
September 30, 2009

Note 1 - The Company and its Significant Accounting Policies

General Business:

From the Company’s inception in 2001 to May 2007, it was in the business of selling nutritional products under the name Quest Group International, Inc. In May 2007, the Company spun off this nutritional products business and began to pursue a new business plan in the pharmaceuticals industry. On May 11, 2007, the Company entered into a license agreement with Vitae Pharmaceuticals, Inc. (“Vitae”), pursuant to which it acquired an exclusive, worldwide sublicense, with the right to grant further sublicenses, to certain compounds and nuclear receptor technology for all human and veterinary use. The principal therapeutic indications for the lead compounds are acute promyelocytic leukemia, solid cancers (lung and breast) and chemotherapy-induced neutropenia (low white cell count). On October 23, 2007, the Company changed its name to NuRx Pharmaceuticals, Inc. (“NuRx”). While NuRx was initially established to explore the broad application of second and third generation retinoid and rexinoid compounds, it has evolved into a more broad Life Sciences company with research and development (“R&D”) interests in additional novel cancer therapeutics and, more recently, a novel delivery of point of care diagnostics. (See Note 5).

Development Stage Enterprise:

The Company is a development stage company as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 915 “Development Stage Entities”. The Company is devoting substantially all of its present efforts to establish a new pharmaceutical business, and its planned principal operations have not yet commenced. The Company has not generated any revenues from operations and has no assurance of any future revenues. All losses accumulated since May 1, 2007 have been considered as part of the Company's development stage activities. The Company held approximately $1.9 million in cash and cash equivalents at September 30, 2009.

Liquidity and Going Concern:
 
Until July 2009, the Company was an early stage R&D biopharmaceutical company with a focus on oncology products (leukemia and lung cancer). The combination of (1) the current suboptimal conditions for new financing of a pure early stage, oncology-focused research and development biotech company and (2) the slower than expected recruitment in its U.S. clinical trials with its resultant delays in delivery of Phase II data, the Company concluded that there was an immediate need to expand its interests to broader areas of life sciences with products that offer a near term revenue stream to support the R&D programs. After examining a number of options in the medical diagnostics arena the Company ultimately focused on point-of-care diagnostics in human and veterinary medicine through QN Diagnostics, LLC (“QND”), a joint venture with QuantRx Biomedical Corporation (“QuantRx”) (See Note 5). At that time, the Company terminated further patient accruals under its U.S. clinical trials, eliminated its U.S. clinical development team, undertook significant cost reductions and limited its focus in drug development to winding down the U.S. clinical trials and supporting the clinical development activities in India in collaboration with Piramal Life Sciences, LTD. (“Piramal”), the Company’s development partner in that region (See Note 12).

As an early stage clinical development company, the Company has not generated any revenues from operations to meet its operating expenses, and has historically financed its operations primarily through issuances of equity securities.
 
F-7

 
Subsequent to September 30, 2009, the Company has called for the redemption of certain shares representing 46.2% of the issued and outstanding shares of the Company at a cost of approximately $1,231,000. On November 13, 2009, the holder of such shares filed a complaint in U.S. District Court in Nevada for declaratory and injunctive relief from such redemption (See Note 16). If completed, the redemption would significantly reduce the cash available for operations.

The QN Diagnostics business is also in its early stage and may require additional funding to complete the development and launch of its initial products, which both venture partners are mutually obligated to provide.

As a result, management believes that given the current economic environment and the continuing need to strengthen the Company’s cash position, there is substantial doubt about its ability to continue as a going concern. The Company continues to actively pursue various funding options, including equity offerings and debt financing, however, there can be no assurance that it will be successful in its efforts to raise additional capital on a timely basis and on acceptable terms.
 
Management believes that the successful growth and operation of the Company’s business is dependent upon its ability to obtain adequate sources of debt or equity financing to:
 
 
·
wind down the U.S. clinical trials and adequately support its clinical development partner in India; and
 
·
fund its share of future additional development costs of the QND joint venture; and
     
 
·
manage or control working capital requirements by further reducing operating expenses.
 
There can be no assurance that the Company will be successful in achieving its long-term plans as set forth above, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue in the long-term as a going concern.
 
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and settlement of obligations in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The report from the Company’s independent registered public accounting firm states that there is substantial doubt about the Company’s ability to continue as a going concern.

Research and Development Costs:

The Company expenses all research and development costs as incurred. Research and development expenses consist of salaries, share based compensation, preclinical activities, pharmacology, stability testing and other drug development costs, clinical trial expenses including patient and data management, outside manufacturing, and consulting costs for regulatory affairs and other activities. Also included in these costs are in-process research and development costs incurred from a licensing agreement as more fully described in Note 4.
 
Effective October 1, 2008, the Company adopted the requirements in FASB ASC 730 “Research and Development” on accounting for nonrefundable advance payments for goods or services received for use in future research and development activities. The requirements are effective for financial statements issued for fiscal years beginning after December 15, 2007, and provide that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. At September 30, 2009, there were no advance payments for drug development manufacturing costs capitalized as prepaid expenses in the accompanying balance sheet.
 
F-8

 
Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Cash and Cash Equivalents:

Cash equivalents are certificates of deposit, U.S. government securities or other highly liquid investments with original maturities of three months or less when purchased. Cash equivalents at September 30, 2009 consist of certificates of deposit, and at September 30, 2008 consist of investments in United States Treasury Bills.

Property and Equipment:

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 5 years. Leasehold improvements are amortized over the shorter of the life of the lease or their useful lives.
 
Income Taxes:

Deferred income taxes are provided in amounts sufficient to give effect to temporary differences between financial and tax reporting, principally related to accruals, in-process research and development costs, and share-based consideration for license milestones.

Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or noncurrent, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
Effective October 1, 2007, the Company adopted changes issued by the FASB under ASC 740 “Income Taxes” that requires the recognition in the financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The adoption of the standard had no effect on the Company’s financial position or results of operations.
 
Earnings Per Common Share:

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share except that the denominator is increased to include additional common shares available upon exercise of stock options and warrants using the treasury stock method, except for periods of operating loss for which no common share equivalents are included because their effect would be anti-dilutive. These potentially dilutive securities were not included in the calculation of loss per share for the fiscal years ended September 30, 2009 and 2008, and the period from inception (May 1, 2007) through September 30, 2009, because the Company incurred a loss during such periods and thus their effect would have been anti-dilutive. Accordingly, basic and diluted loss per share are the same for these periods. At September 30, 2009 and 2008, potentially dilutive securities consisted of outstanding warrants and stock options to acquire an aggregate of 4,925,560 and 4,393,500 shares, respectively.
 
F-9

 
Fair Value of Financial Instruments:

The Company’s financial instruments consist of cash, certificates of deposit, note receivable from Piramal and warrants to purchase common stock of QuantRx. The carrying amount of these financial instruments approximates fair value.

Variable Interest Entities/Equity Method of Accounting
 
The Company has evaluated its material contractual relationships and has concluded that the entities involved in these relationships are not Variable Interest Entities ("VIEs") or, in the case of QND, a 50% joint venture , that the Company is not the primary beneficiary of the VIE. As such, the Company accounts for the activities of QND utilizing the equity method of accounting The Company recorded a loss from QND under the equity method of $464,755, representing the Company’s 50% portion of the activities of QND from inception (July 30, 2009) through September 30, 2009 (See Note 5).
 
Concentrations of Credit Risk:

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents in interest and non-interest bearing transaction accounts at a Standard & Poor’s AAA rated domestic bank. Under the current Temporary Liquidity Guarantee Program of the Federal Deposit Insurance Corporation (“FDIC”), interest bearing transaction accounts are insured up to $250,000 and non-interest bearing transaction accounts are insured without limit. As of September 30, 2009 and 2008, the Company had approximately $0 and $3,009,000, respectively, of cash in excess of these limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

Impairment of Long-Lived Assets:

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s management assesses the recoverability of long-lived assets by determining whether the depreciation and amortization of long-lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment, if any, is measured based on fair value and is charged to operations in the period in which long-lived asset impairment is determined by management. At September 30, 2009 and 2008, the Company’s management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change which could result in impairment of long-lived assets in the future.

Recently Adopted Accounting Pronouncements:
 
On September 30, 2009, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the financial statements.
 
F-10

 
On October 1, 2008, the Company adopted the fair value measurement and disclosure requirements of ASC 820 “Fair Value Measurements and Disclosures”. ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. FASB ASC 820 is generally required to be applied on a prospective basis, except to certain financial instruments accounted for under FASB ASC 815 “Derivatives and Hedging” regarding accounting for derivative instruments and hedging activities, for which the provisions of FASB ASC 820 should be applied retrospectively.  On October 10, 2008, the FASB issued further clarification of the application fair value measurements in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  The adoption of FASB ASC 820 did not have a material effect on the financial statements for the fiscal year ended September 30, 2009.
 
Effective October 1, 2008, the Company adopted the requirements of FASB ASC 825 “Financial Instruments” issued by the FASB in February 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Company’s Board of Directors long-term measurement objectives for accounting for financial instruments. Adoption of the standard had no effect on the Company’s financial position or results of operation.
 
In March 2008, the FASB issued amended and expanded disclosure requirements relating to accounting for derivative instruments and hedging activities under ASC 815. The objective of the amended and expanded requirements is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB ASC 815 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. FASB ASC 815 now requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FASB ASC 815 applies to all derivative financial instruments, including bifurcated derivative instruments (including non-derivative instruments that are designed and qualify as hedging instruments) and related hedged items. The amended and expanded requirements are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. FASB ASC 815 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company adopted the amended and expanded requirements of FASB ASC 815 on January 1, 2009, which did not have any impact on the Company’s financial statement presentation or disclosures.

Effective June 30, 2009, the Company adopted the requirements of FASB ASC 855 “Subsequent Events” which establishes the general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued.  ASC 855 also sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should provide about events or transactions that occurred after the balance sheet date. FASB ASC 855 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively.  Subsequent events have been evaluated by the Company through December 28, 2009.
 
In April 2009, the FASB issued requirements under ASC 825 to disclose the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. It further requires such disclosures in the summarized financial information at interim reporting. On June 15, 2009, the Company adopted these interim disclosure requirements, which did not have any impact on the Company’s financial statement presentation or disclosures.
 
F-11

 
Recent Accounting Pronouncements:

In June 2009, the FASB amended the requirements relating to the accounting for variable interest entities under ASC 810.  The amendments require an enterprise to qualitatively assess the determination of the primary beneficiary (or “consolidator”) of a variable interest entity, (“VIE”), based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The amendments change the consideration of kick-out rights in determining if an entity is a VIE and requires an ongoing reconsideration of the primary beneficiary. They further amend the events that trigger a reassessment of whether an entity is a VIE. The amendments are effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier adoption is prohibited. The Company does not expect that the adoption of these amendments will have a material impact on its results of operations or financial condition.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

Note 2 - Property and Equipment

Property and equipment consisted of the following at September 30, 2009 and 2008:

   
2009
   
2008
 
Office equipment
 
$
33,264
   
$
24,541
 
Computer equipment
   
11,564
     
11,564
 
Lab equipment
   
46,466
     
19,129
 
Leasehold Improvements
   
1,200
     
1,200
 
     
92,494
     
56,434
 
Accumulated depreciation and amortization
   
(25,710
)
   
(11,336
)
   
$
66,784
   
$
45,098
 

Depreciation and amortization expense for the years ended September 30, 2009 and 2008 amounted to $14,374, and $9,954, respectively.

Note 3 – Reverse Stock Split

On May 9, 2008, the Company completed a one-for-four reverse stock split for common shareholders of record on that same date. As a result of the reverse stock split, the number of common shares outstanding was reduced to 28,394,234 from 113,576,927 shares outstanding immediately prior to the effective date. Common shares authorized were unchanged, resulting in an increase in the number of authorized but unissued shares of common stock to 121,605,766 from 36,423,073. The per unit exercise price of all outstanding options and warrants were increased proportionately and shares issuable under such instruments were decreased proportionately.

The reverse stock split did not affect the par value of the Company’s common stock. As a result, the stated capital on the Company’s balance sheet attributable to the outstanding common stock was reduced by $91,002 to $30,334 (one-fourth of its amount immediately preceding the reverse stock split), and the additional paid-in capital account was increased by $91,002. The per share net income or loss and net book value of the outstanding common stock increased because there are fewer shares of the Company’s common stock outstanding.
 
The Company’s financial statements and footnotes give retroactive effect to this stock split.
 
F-12

 
Note 4 – Vitae License and Amendment

On May 11, 2007, the Company entered into a license agreement with Vitae Pharmaceuticals, Inc. (“Vitae”), pursuant to which the Company acquired an exclusive, worldwide sublicense (with the right to grant further sublicenses) to certain compounds and technology for all human and veterinary use, in order to research, develop and commercialize the compounds. The indications for the lead compounds are acute myeloid, solid cancers (lung and breast) and chemotherapy-induced neutropenia. The Company paid Vitae an aggregate of $2.15 million, comprised of an upfront license fee of $2.1 million and $50,000 for its inventory of the licensed compounds. As a milestone payment required under the license, the Company also issued to Vitae 1,756,732 shares of common stock, or such number representing 5.66% of the Company’s fully diluted shares, on October 17, 2007, the date it received acceptance of an Investigational New Drug Application (“IND”) by the United States Food and Drug Administration for a licensed compound that had not previously received an IND. The Company will also be required to pay, on Vitae’s behalf, the existing licensors additional milestone payments if it reaches FDA marketing approval for a product containing a licensed compound.

In addition to the aforementioned fees and milestone payments, the Company agreed to pay the original licensor of the compounds and Vitae specified revenue percentages of the Company’s net sales of products based on the licensed technology. The percentages vary from product to product, but when combined may total as much as 12% of the Company’s net sales. The Company must meet certain development milestones under the original license agreements with the existing licensors in order to maintain the rights to the licensed products, including, among others, filing at least one New Drug Application (“NDA”) in the U.S. or another major market for a product by May 10, 2011. The Company also agreed to pay Vitae a specified percentage of any sublicense revenues received from any sublicense of the licensed technology.

On December 31, 2008, the Vitae license was amended to include certain additional intellectual property and compounds potentially useful in dermatological therapeutic applications. In consideration of the amendment, the Company paid Vitae $125,000 in cash and issued 50,000 shares of common stock, valued at $2.00 per share.

The acquired assets, which consist of intellectual property and inventory of compounds at the date of acquisition and date of amendment, were determined to be in the research and development stage (the pre-clinical discovery stage). The primary compounds underlying the patents and licenses are to be used in ongoing research and development activities and are not determined to have any alternative future uses. Accordingly, pursuant to the provisions of FASB ASC 730, the Company has charged the costs of the acquired assets to expense.
 
Note 5 – Joint Venture with QuantRx Biomedical Corporation

On July 30, 2009, the Company and QuantRx Biomedical Corporation (“QuantRx”) entered into agreements to form QN Diagnostics, LLC, a Delaware limited liability company (“QND”). Pursuant to the agreements, QuantRx contributed certain intellectual property and other assets related to its lateral flow strip technology and related lateral flow strip reader technology with a fair value of $5,450,000, and NuRx contributed $5,000,000 in cash to QND. Following the respective contributions by NuRx and QuantRx to the joint venture, NuRx and QuantRx each own a 50% interest in QND. QND is managed by a Board of Managers consisting of members from both NuRx and QuantRx and an independent member mutually agreed by the members. The purpose of the joint venture is to develop and commercialize products incorporating the lateral flow strip technology and related lateral flow strip readers.

Under the terms of the agreements, QND made a $2,000,000 cash distribution to QuantRx. QuantRx is committed to further capital contributions aggregating $1.55 million, comprised of certain milestone payments under a technology purchase agreement in QuantRx common stock (fair value of $750,000); transfer of fixed assets with a fair value of $100,000 to QND at time requested by the QND Board of Managers; and a $700,000 sustaining capital contribution as required to sustain QND operations. If necessary, subsequent sustaining capital contributions will be made by QuantRx and NuRx on an equal basis.

QuantRx and QND also entered into a one year Development and Services Agreement, pursuant to which QND shall pay a monthly fee consisting of a base of $250,000 plus approved overages, not to exceed $3.7 million to QuantRx in exchange for QuantRx providing all services related to the development, regulatory approval and commercialization of lateral flow products.  For the period July 30, 2009 (inception) through September 30, 2009 an aggregate of $683,987 was paid by QND to QuantRx pursuant to this agreement with an additional $171,354 was accrued at September 30, 2009.
 
F-13

 
In connection with these transactions on July 30, 2009, NuRx received two warrants to purchase 2,000,000 shares of QuantRx common stock each, for an aggregate of 4,000,000 shares of QuantRx common stock. The warrants are separately stated as “Other Investments” (see Note 6).

Summarized financial information of QND for the period July 30, 2009 (inception) through the period ended September 30, 2009, is as follows:
 
 
·
revenues and gross profit: $50,000; net loss: $929,510. The Company recorded a loss from QND under the equity method of $464,755, representing the Company’s 50% portion of QND’s net loss. There were no intercompany profits to eliminate.

 
·
total assets of approximately $7,711,000 consisting of $2,061,000 in cash, $25,000 in contract receivables, $253,000 in prepaid expenses, $5,000 of fixed assets (net of $120 in accumulated depreciation) and $5,367,000 in intangible assets (net of $82,800 in accumulated amortization). Total payables approximated $190,000 at September 30, 2009.
 
The "Investment in Joint Venture” presented on the balance sheet at September 30, 2009 reflects the cash investment of $5,000,000, less the equity method loss for the period July 30, 2009 (inception) through September 30, 2009 of $464,755, less the $1,000,000 fair value of warrants in QuantRx received in connection with the formation of QND.

Pursuant to the LLC Operating Agreement, NuRx has the right, prior to the achievement of two specified milestones by QND and subject in certain circumstances to prior approval by QuantRx, to withdraw up to $1,500,000 of its capital contribution from the joint venture. If withdrawn, the funds must be returned to the joint venture within thirty days of the achievement of the respective milestone. The first milestone was achieved in November, 2009 and $1,000,000 was released into the QND operating account. As a result, NuRx may request withdrawal of up to $500,000 prior to achievement of the second milestone.

As of September 30, 2009, $15,625 included in other receivables was due from QND for reimbursement of compensation and related payroll costs related to the employment of a QND executive for which the Company acted as nominal employer on behalf of QND under the employment agreement with the executive. Under this agreement, the Company is obligated to advance compensation and related payroll costs for the executive through December 31, 2009, and QND is obligated to reimburse the Company for these advances upon receipt by QND of first cash flow from product sales.
 
Note 6– Other Investments

 The following table summarizes the Company’s long-term investments classified as available-for-sale at September 30, 2009:
 
  
 
Cost
   
Gross
unrealized
gains
   
Unrealized
losses
   
Fair
value
 
Warrants to purchase QuantRx Biomedical Corporation common shares
 
$
1,000,000
   
$
   
$
   
$
1,000,000
 
 
The investments consist of two warrants to purchase 2,000,000 shares of QuantRx common stock each, for an aggregate of 4,000,000 shares of QuantRx common stock, received in connection with the formation of QN Diagnostics, LLC, on July 30, 2009. (See Note 5). The warrants expire on July 30, 2014 and have exercise prices of $0.50 and $1.25, respectively.
 
F-14

 
The fair value of the warrants at the date of issuance using the Black-Sholes pricing model was $1,000,000 using the following assumptions:

  
  
Assumptions
  
Expected Volatility
   
70
%
Expected Dividends
   
-
 
Expected term, in years
   
5.0
 
Risk-free rate
   
3.24
%

There was no change in fair value of the warrants for the period ended September 30, 2009.

FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1: Quoted prices (unadjusted) in active markets for an identical asset of liability that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based derivatives.

Level 2: Inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.

Level 3: Unobservable inputs for the assets or liability are only used when there is little, if any, market activity for the asset or liability at the measurement date. Financials assets and liabilities utilizing level 3 inputs include infrequently traded, non-exchange-based derivatives and commingled investment funds and are measured using present value pricing models.

The warrants to purchase shares of QuantRx common stock are measured and recorded at fair value on the Company’s balance sheets using Level 2.

Note 7 - Related Party Transactions

On May 1, 2007, the Company entered into a consulting agreement with an affiliate to provide consulting services relating to strategic planning, investor relations and corporate governance for a monthly fee of $30,000, plus reimbursement of expenses, for a six-month period ended on October 31, 2007. The consulting agreement provided for automatic extensions at the end of each six-month term, unless terminated by either party at least 30 days prior to the end of such term. The agreement was terminated on October 30, 2008. For the years ended September 30, 2009 and 2008, and from inception (May 1, 2007) through September 30, 2009, the Company incurred costs of $30,000, $360,000, and $540,000, respectively, pursuant to this consulting agreement.

On November 5, 2007, the Company entered into a five year consulting agreement effective May 31, 2007 with a company wholly owned by an affiliate to provide the technical services of that affiliate along with other employees and resources of the consulting company. This contract was changed to “at-will” as discussed in Note 13. The consulting agreement superseded an existing five year employment agreement with that affiliate. For the years ended September 30, 2009 and 2008, and from inception (May 1, 2007) through September 30, 2009, the Company incurred costs of $140,000, $238,910, and $378,910, respectively under the consulting agreement (See Notes 13 and 15).

For the years ended September 30, 2009 and 2008, and for the period from inception (May 1, 2007) through September 30, 2009, the Company incurred and paid an aggregate of $0, $17,500, and $32,000 respectively, for advisory and corporate board meeting management, website and graphics design services provided by a company 100% owned by the spouse of a stockholder.
 
F-15

 
Note 8 - Stock Options and Warrants

Options

In 2007, the Company adopted a stock compensation plan, the 2007 Stock Compensation Plan (the “Plan”), pursuant to which it is authorized to grant options, restricted stock and stock appreciation rights to purchase up to 3,750,000 shares of common stock to the Company’s employees, officers, directors, consultants and advisors.
 
The 2007 Stock Plan is administered by the Company’s Board of Directors or a committee appointed by the Board, which determines the persons to whom awards will be granted, the type of award to be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the Plan.

All options issued pursuant to the Plan have an exercise price that is greater than or equal to the fair market value of the Company’s common stock on the date of grant.

On March 6, 2009, in order to provide continued economic incentive to option holders, most of whose options were issued at prices that were “out of the money”, the Board of Directors authorized a re-pricing of all 1,406,000 shares under stock option grants previously issued through that date to an exercise price of $0.45 per share from the post reverse-split adjusted $4.00 exercise price at date of grant. The incremental compensation cost computed using the Black-Scholes option pricing model was $242,000. The amount of the incremental compensation cost attributable to options vested as of the date of re-pricing was $100,000 which was charged to expense at that date. The amount of incremental compensation cost attributable to option grants vesting after the date of re-pricing was $142,000, of which $36,000 was charged to expense during the year ended September 30, 2009, and the remaining $106,000 will be recognized over the remaining vesting period of the underlying grants. There were no other changes to the terms of any stock option grants (See Note 9).

Restricted shares of 12,500 have been issued under the Plan.
 
A summary of option activity under the Plan for the years ended September 30, 2009 and 2008 is as follows (shares and share prices reflect the 4:1 reverse split):

  
 
For the year ended September 30,
 
  
 
2009
   
2008
 
  
       
Weighted
         
Weighted
 
  
       
Average
         
Average
 
  
 
Shares
   
Exercise
Price
   
Shares
   
Exercise
Price
 
Stock options at beginning of year
   
1,306,000
   
$
0.45
     
931,000
   
$
0.45
 
Stock options granted
   
650,000
   
$
0.45
     
375,000
   
$
0.45
 
Stock options forfeited
   
(117,940
)
 
$
0.45
     
-
   
$
-
 
                                 
Stock options at end of year
   
1,838,060
   
$
0.45
     
1,306,000
   
$
0.45
 
Stock options exercisable at end of year
   
874,968
   
$
0.45
     
422,102
   
$
0.45
 
                                 
Shares available for future grant under Plan
   
1,899,440 
             
2,431,500 
         
 
F-16

 
The weighted average remaining life of outstanding options at September 30, 2009 was 42 months. The intrinsic value is not greater than the grant price.

Warrants

A summary of warrants issued during the years ended September 30, 2009 and 2008 is as follows: 

  
 
For the year ended September 30,
 
  
 
2009
   
2008
 
  
       
Weighted
         
Weighted
 
  
       
Average
Exercise
         
Average
Exercise
 
  
 
Shares
   
Price
   
Shares
   
Price
 
Warrants at beginning of year
   
3,087,500
   
$
4.01
     
3,100,000
   
$
4.02
 
Warrants issued
   
-
   
$
-
     
-
   
$
-
 
Warrants forfeited
   
-
   
$
-
     
(12,500
)
 
$
8.00
 
                                 
Warrants at end of year
   
3,087,500
   
$
4.01
     
3,087,500
   
$
4.01
 

All warrants were exercisable at September 30, 2008 and 2009.

The weighted average remaining life at September 30, 2009 was 44 months. The intrinsic value is not greater than the grant price.

Note 9 - Share Based Payments

Pursuant to the provisions of FASB ASC 718 “Compensation – Stock Compensation”, the cost resulting from all share-based payment transactions (including, but not limited to grants of employee options, and warrants to purchase the Company’s common stock) shall be recognized in the statement of operations based on their fair values, unless related to capital financing.

The fair value of each option award and warrant grant for the years ended September 30, 2009 and 2008 is estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions:
 
  
  
Options
  
 
Warrants
  
Expected Volatility
   
75
%
 
75
%
Expected Dividends
   
-
   
-
 
Expected term, in years
   
3.5-4.0
   
4.75-6.0
 
Risk-free rate
   
1.4-4.9
%
 
4.64-5.01
%

On October 31, 2007, the Company received approval for an Investigational New Drug (“IND”) with respect to one of its drug candidates. This approval triggered a milestone payment under the Company’s license agreement with Vitae of 1,756,732 common shares, representing 5.66% of the Company’s fully diluted common stock on the effective date of the license agreement. The fair market value of these shares at October 31, 2007 was $2.00 per share, which resulted in a charge of $3,513,000 to in-process research and development expenses on that date and an increase in stockholders’ equity.
 
F-17

 
On November 28, 2007, the Company awarded options to purchase 50,000 shares of common stock to a new director at an exercise price of $4.00 per share (prior to re-pricing to $0.45 per share on March 6, 2009). The options vest 100% upon grant, and have a five year term. The fair value of the option award, estimated on the date of grant using the Black-Scholes option pricing model was $41,800 (prior to re-pricing to $0.45 per share on March 6, 2009). The option value of $41,800 was amortized to expense over the director’s initial 12 month board term; $7,600 and $34,200 for the years ended September 30, 2009 and 2008, respectively.
 
On May 15, 2008, the Company awarded options to purchase 250,000 shares of common stock to four employees at an exercise price of $4.00 per share (prior to re-pricing to $0.45 per share on March 6, 2009). The options vest one-third upon grant, the balance ratably over a period of 36 months so long as the employees continue in the employment of the Company. The options have a five year term which shall be extended to six months following termination if the employee continues to be employed on the fifth anniversary of the grant, but not beyond ten years from the date of grant. The fair value of these option awards, estimated on the date of grant using the Black-Scholes option pricing model was $187,000 (prior to re-pricing to $0.45 per share on March 6, 2009). The option value is amortized to expense over three years from the date of grant consistent with the vesting terms; $41,566 and $76,185 for the years ended September 30, 2009 and 2008, respectively.

On August 1, 2008, the Company awarded options to purchase 75,000 shares of common stock to an employee at an exercise price of $4.00 per share (prior to re-pricing to $0.45 per share on March 6, 2009). The options vest ratably over a period of four years so long as the employee continues in the employment of the Company. The option has a five year term which shall be extended to six months following termination if the employee continues to be employed on the fifth anniversary of the grant, but not beyond ten years from the date of grant. The fair value of these option awards, estimated on the date of grant using the Black-Scholes option pricing model, was $56,000 (prior to re-pricing to $0.45 per share on March 6, 2009); $14,000 and $2,333 for the years ended September 30, 2009 and 2008, respectively.

On October 28, 2008, the Company awarded options to purchase an aggregate of 100,000 shares of common stock to two new directors at an exercise price of $4.00 per share. The options vest 100% upon grant, and have a five year term. The fair value of the option awards estimated on the date of grant using the Black-Scholes option pricing model was $82,000 (prior to re-pricing to $0.45 per share on March 6, 2009). The option value was amortized to expense over the directors’ initial 12 month board term; $75,167 for the year ended September 30, 2009.

 On December 31, 2008, the Company entered into an amended and restated license with Vitae which provided for the issuance of 50,000 shares of common stock effective on that date. The fair market value of these shares on December 31, 2008 was $2.00 per share, which resulted in a charge of $100,000 to in-process research and development expenses on that date and an increase in stockholders’ equity.

 On March 6, 2009, the Company awarded options to purchase an aggregate of 250,000 shares of common stock to an executive at an exercise price of $0.45 per share, the fair market value at that time. The options vest ratably over the 36 month period following the date of grant. The options have a five year term which shall be extended to six months following termination if the employee continues to be employed on the fifth anniversary of the grant, but not beyond ten years from the date of grant. The fair value of the option awards estimated on the date of grant using the Black-Scholes option pricing model was $54,000. The option value is amortized to expense over the 36 month vesting period; $10,500 for the year ended September 30, 2009.
 
On June 8, 2009, the Company awarded options to purchase an aggregate of 50,000 shares of common stock to a member of the Board of Directors at an exercise price of $0.45 per share. The options vest fully on the date of grant. The options have a five year term which shall be extended to six months following termination if the member continues to be employed on the fifth anniversary of the grant, but not beyond ten years from the date of grant. The fair value of the option awards estimated on the date of grant using the Black-Scholes option pricing model was $12,000.  The option value is amortized to expense ratably over the 12 month period following grant; $4,000 for the year ended September 30, 2009.
 
F-18

 
On September 18, 2009, the Company issued options to purchase 250,000 shares of the Company’s common stock to an executive of QND (See Note 5) at an exercise price of $0.45 per share. The options vest 25% upon the first anniversary of the grant, then 1/36th of the remaining balance on a monthly basis thereafter. The options have a five year life. The fair value of the option awards estimated on the date of grant using the Black-Scholes option pricing model was $49,000.  On November 6, 2009, the executive resigned from QND, none of the issued options vested, and no expense resulting from the issuance has been or will be recognized.

Note 10 - Lease Commitments

The Company entered into a three year lease of approximately 2,960 sq. ft. for premises located in Irvine, California in which it conducts its operations. The lease commenced July 15, 2007 and ends on July 31, 2010. The base rent is $4,096 per month through July 31, 2008, $4,243 per month through July 31, 2009, and $4,389 per month thereafter. In addition, the Company entered into a one year lease of approximately 100 sq. ft. in Nevada for sales and recruiting activities in connection with the QN Diagnostics point-of-care diagnostic devices directed to the law enforcement and hospitality market segments. The annual lease of $2,500 was prepaid in full at September 30, 2009. Rent expense for the years ended September 30, 2009 and 2008 was $69,610 and $61,329, respectively. Minimum payments under operating leases are approximately $48,400 through July 31, 2010.
 
Note 11 - Income Taxes

Deferred income taxes are provided for the differences between the basis of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company recorded a deferred income tax asset for the tax effect of net operating loss carry-forwards, in-process research and development, share-based milestone payments and other temporary differences, aggregating approximately $6,274,000 and $4,153,000 at September 30, 2009 and 2008. In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be realized, the Company has recorded a full valuation allowance at September 30, 2009 and 2008.
 
The Company has net Federal and California losses for tax purposes totaling approximately $9,685,000 and $9,610,000, respectively, which may be applied against future taxable income and will expire in 2028 and 2018. The California net operating loss carry-forward has been suspended for two years. Accordingly, there is no tax expense for the years ended September 30, 2009 and 2008, and the period inception (May 1, 2007) through September 30, 2009. The potential tax benefits arising from these losses have not been recorded in the financial statements. The Company evaluates its valuation allowance requirements on an annual basis based on projected future operations. When circumstances change and cause a change in management’s judgment about the realizability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current operations.
 
Significant components of the Company’s net deferred tax assets at September 30, 2009 and 2008 are as follows:
 
   
Year ended
September 30,
2009
   
Year ended
September 30,
2008
 
Tax loss carryforwards
  $ 3,692,000     $ 1,717,000  
Share based compensation
    361,000       167,000  
In-Process R&D/share based milestone payments
    2,177,000       2,251,000  
Depreciation/Amortization/Gain/Loss
    17,000       (1,000 )
Vacation accrual
    27,000       19,000  
Valuation allowance
    (6,274,000 )     (4,153,000
    $     $  
 
F-19

 
The provision for income taxes differs from the amount computed at federal statutory rates as follows:
 
   
Year ended
 September 30,
2009
   
Year ended
September 30,
2008
   
May 1, 2007
(inception)
through
September 30,
2009
 
Provision for income taxes at 34% statutory rate
  $ (1,856,000 )   $ (2,495,000 )     (5,400,000 )
State taxes, net of federal benefit
    (319,000 )     (429,000     (928,000 )
Change in valuation allowance
    2,121,000       2,424,000       6,274,000  
Other
    54,000             54,000  
    
  $     $     $  

The Company has not recorded any uncertain tax positions under FASB ASC 740 as of September 30, 2009 or 2008.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2009 and 2008, the Company has no accrued interest and penalties related to uncertain tax positions.

Effective October 1, 2007, the Company adopted changes issued by the FASB under ASC 740 that requires the recognition in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The adoption of the standard had no effect on the Company’s financial position or results of operations.

The Company is subject to taxation in the U.S. and California. The tax years 2006 to 2008 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company currently is not under examination by any tax authority.
 
Note 12 – Piramal Agreement

On March 6, 2009, the Company entered into a development and commercialization agreement with Piramal Life Sciences, Limited (“Piramal”) with respect to compound NRX 5183 in India (the “Piramal Agreement”). Pursuant to the Piramal Agreement, Piramal has the exclusive right to develop, manufacture and exploit the NRX 5183 technology within India at its sole expense. The Company obtains the clinical data for use in registration in countries outside of India. Piramal will also reimburse the Company for development expenses incurred with regard to clinical trials in India up to $100,000. This reimbursement has been recorded as a receivable with a corresponding reduction of research & development expenses at September 30, 2009.
 
Note 13 – Executive Compensation

On April 15, 2009, the Company entered into amendments to the Consulting Agreement with SOQ, Inc. (a company owned by Dr. Parkash Gill, a Director of the Company and Chairman of the Scientific Advisory Board) and the Employment Agreements with each of Dr. Harin Padma-Nathan, the Company’s Chief Executive Officer, and Dr. Rosh Chandraratna, the Company’s Chief Scientific Officer, to change the term of each agreement from five years to “at-will”, allowing either party to terminate the agreements immediately upon written notice to the other party, with or without “Cause” or “Good Reason”. The agreements were also amended to eliminate the automatic renewal of the agreement each year for additional one-year periods (See Note 16).

On October 3, 2009, the Company terminated the at-will employment contract of Dr. Chandraratna and simultaneously entered into a consulting agreement with him to continue to provide the services of Chief Scientific Officer on an hourly basis terminable upon ten days written notice.
 
F-20

 
Note 14 – Stockholder Rights Plan

Effective June 1, 2009, the Company’s Board of Directors adopted a stockholder rights plan (the “Rights Plan”). Pursuant to the Rights Plan, the Board of Directors declared a dividend distribution of one right for each share of common stock. Each right entitles the holder to purchase from the Company one one-hundreth of a share of Series C Preferred Stock at an initial exercise price of $5 per share. The Rights Plan is intended to assure that all of the Company’s stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to protect stockholders’ interests in the event the Company is confronted with partial tender offers or other coercive or unfair takeover tactics.  Rights become exercisable upon the earlier of (i) ten days following the acquisition by a person or group of 20% or more of the Company’s outstanding common stock, and (ii) ten business days after the announcement of a tender offer or exchange offer to acquire 20% or more of the outstanding common stock. The continuing directors (defined as the directors who are not affiliated or associated with an acquiring person) may vote to extend these timeframes in their discretion. If such a person or group acquires 20% or more of the common stock, each right (other than such person’s or group’s rights, which will become void) will entitle the holder to purchase at an exercise price equal to 50% of the then current trading price of the Company’s common stock.  In the alternative, the Board of Directors may authorize issuance of one share of fully paid common stock for each right. If not redeemed, the rights will expire on June 1, 2014. These rights have become exercisable at September 30, 2009, but the exercise (distribution date) has been extended.
 
Note 15 – Settlement Agreement and Share Buy Back

On July 30, 2009, the Company completed the repurchase of 5,000,000 shares of its common stock, representing approximately 17.6% of its issued and outstanding shares of common stock. The shares were repurchased from former director Parkash Gill, M.D. pursuant to a Stock Purchase and Standstill Agreement dated July 27, 2009 (the “Purchase Agreement”). Dr. Gill resigned from the Board of Directors of the Company effective June 13, 2009. The Company cancelled the 5,000,000 shares of common stock.

Under the Purchase Agreement, the Company agreed to repurchase the 5,000,000 shares for a cash payment of $250,000 to Dr. Gill, and Dr. Gill agreed to standstill provisions under which he would refrain for a period of three years from acquiring beneficial ownership of additional shares of the Company’s common stock, seeking to influence the management or policies of the Company or proposing any business combination or other extraordinary transaction involving the Company. Dr. Gill also agreed to refrain from disposing of any of the remaining 1,000,000 shares that he beneficially owns for a period of three years, except beginning February 1, 2010 and for a period of 20 months thereafter, transactions of up to 50,000 shares per calendar month. In addition, the Company’s Board of Directors was granted a proxy to vote the remaining 1,000,000 shares that Dr. Gill beneficially owns.

The Purchase Agreement was executed in connection with a Mutual General Release and Waiver Agreement dated July 27, 2009, under which Dr. Gill and the Company provided each other with mutual general releases of all claims.

Note 16 – Subsequent Events

Redemption of Control Shares under Nevada Control Shares Act
 
On October 29, 2009, pursuant to the authority provided in the Bylaws and pursuant to Nevada Control Share Act ((the “Nevada Act”), the Company called for redemption of the entire 10,832,876 common share holding of DYVA Management Ltd. and its affiliates (“DYVA”), which such shares represent 46.2% of the total issued and outstanding shares of the Company. Under the Nevada Act, the Company is entitled to call for redemption of DYVA’s shares at the average price paid by DYVA for its shares, which has been reported by DYVA to be for 833,298 Euros ($1,231,000).
 
F-21

 
On November 13, 2009, DYVA filed a complaint in the United States District Court, District of Nevada seeking declaratory and injunctive relief to halt the proposed redemption. In addition, the complaint seeks attorneys fees and costs to the extent permitted by law and any further and other relief the Court may deem proper.

Executive Compensation
 
On October 29, 2009, the Company granted options to purchase 500,000 shares of common stock to the Chief Executive Officer at an exercise price of $0.45 per share. The options vest ratably over the 36 months following the date of grant. The options have a five year term. The fair value of the option awards estimated on the date of grant using the Black-Scholes option pricing model was $101,000 using the following assumptions:
 
  
  
Assumptions
  
Expected Volatility
   
75
%
Expected Dividends
   
-
 
Expected term, in years
   
3.5
 
Risk-free rate
   
1.75
%

The option value is amortized to expense ratably over the 36 month period following the grant date.

In addition, on October 29, 2009, the CEO’s annual compensation was increased to $325,000 retroactive to September 24, 2009. No other changes were made to his “at will” employment agreement. An accrual for $2,010 has been included in accrued expenses at September 30, 2009.
 
F-22